Interest Rate Roundup

Friday, February 27, 2009

Ugly stocks, ugly bonds, but the dollar keeps doing its Energizer Bunny thing

There was more interesting market action today. The S&P 500 closed at a 12-year low, with other key indices (transports, utilities) also falling sharply. Despite that selling, long bonds couldn't catch a bid. The futures finished down 31/32 at 124 25/32, a fresh low for this bearish move. Meanwhile, the dollar index is finishing the day around 88.17, slightly below its previous closing high.

By the way, did you know there is an index that was recently put together to track the performance of the shares of companies that receive government aid? It's true. It's called the Nasdaq OMX Government Relief Index, or QGRI. The starting value as of 1/5/09: 1,000. Its current value: 538.16. That's a 46.2% decline in less than two months, much worse than the 21% decline in the S&P 500 during that same period. What a great ROI for our taxpayer dollars, eh?

Q4 GDP revised down to -6.2% from -3.8%

The U.S. economy performed even worse than previously believed -- and worse than economists expected. The revised Q4 2008 GDP number that was just released came in at negative 6.2%, vs. the previous estimate of -3.8% and the market expectation for a reading of negative 5.4%. That makes last quarter the worst for the economy since 1982. Consumer spending fell at a 4.3% rate, the worst contraction since 1980.

Some market action worth noting: The Dollar Index is flying as a result, tagging its November high just below 88.50. S&P futures are down 19 handles, undercutting their November low. Meanwhile, the terms of the Citigroup bailout (finally confirmed this a.m.) appears to have bank stock investors skittish. The stock is plunging in the pre-market, dragging other banks down as well.

Thursday, February 26, 2009

Q4 2008 QBP: Banking industry loses $26.2 billion, failures hit 15-year high

Every quarter, the FDIC releases a document called the Quarterly Banking Profile. It provides a wealth of data about banking industry losses, loan performance, failed banks, and more. The latest report (PDF Link) just hit the tape, and here are some of the details:

* The banking industry as a whole lost $26.2 billion. That was a large swing from the year-ago profit of $575 million that the industry generated. It was also the first time since Q4 1990 that U.S. banks, in the aggregate, lost money.

* Loan loss provisions soared to $69.3 billion from $32.1 billion in Q4 2007. Large trading losses and goodwill impairments were big contributors to bank losses. Noninterest income declined as loan servicing income fell $3.1 billion YOY and securitization income plunged 52.3%. On the other hand, net interest income climbed 4.9% and net interest margins inched up to 3.34% from 3.32%. The FDIC noted, however, that the improvement was mostly seen at large institutions. Smaller banks (sub-$1 billion in assets) had the worst margins since Q2 1988 due to upward pressure on deposit rates.

* Total net chargeoffs of loans and leases surged 132% to $37.9 billion from $16.3 billion a year earlier. If you annualize the quarterly charge-off rate, you get a reading of 1.91%, tying Q4 1989 for a record high (data collection goes back 25 years). By loan category, real estate construction and development loan charge-offs increased 448% year-over-year. One to four family residential mortgage charge-offs jumped 206%, while commercial and industrial COs climbed 97.3% and credit card COs rose 60.1%.

* Noncurrent loans and leases are also climbing. Noncurrent loans rose to $230.7 billion from $110.7 billion a year earlier, a surge of 108.4%. Some 2.93% of loans and leases are now noncurrent, the highest percentage since 1992.

* Banks added $16.5 billion to their reserves in the fourth quarter, while cutting total loans. That cause the ratio of reserves to total loans to rise to a 14-year high of 2.2%. But noncurrent loans rose more sharply than reserves, driving the reserves-to-noncurrent loans (or coverage) ratio down to 75 from 83.9. That's the lowest since 1992.

* Finally, 25 banks with assets of $372 billion failed last year. That's the highest tally since 1993, when 41 banks with assets of $3.8 billion failed. The total number of banks on the FDIC's "Problem List" jumped to 252 from 76 at year-end 2007. Those institutions had total assets of $159 billion, up more than seven-fold from $22 billion a year earlier.

What's $1.75 trillion among friends, right?

The Obama administration has released its big-picture budget outlook for 2009 and beyond. The big headline: The U.S. government is on track to record a deficit of a whopping $1.75 TRILLION in fiscal 2009. That is by far the biggest deficit ever, and almost four times as large as the $459 billion figure for 2008. It's also a gigantic 12.3% of GDP, the most in the post-World War II era.

It includes all kinds of goodies, including another potential $250 billion in bank bailout money (on top of the $700 billion in TARP money previously allocated). The budget also assumes a 1.2% decline in 2009 and a 3.2% expansion in 2010, which is more optimistic than the 2% decline and 1.8% increase that private economists are generally looking for. It also projects unemployment rates of 8.1% and 7.9% for the coming two years, less than the 8.4% and 8.5% projections found in a Bloomberg survey.

New home sales collapse 10.2% in January to record low

In the wake of yesterday's dismal existing home sales figures for January, we received awful new home sales figures today. The details can be found below ...

* New home sales collapsed 10.2% to a seasonally adjusted annual rate of 309,000 from 344,000 in December. That was worse than the average forecast of economists surveyed by Bloomberg, who were looking for a reading of 324,000, and the worst level in U.S. history. The data goes back to 1963.

* The raw number of homes for sale continued to decline, falling by 3.1% to 342,000 from 353,000 in December. The months supply at current sales pace indicator of inventory ballooned, however, hitting 13.3. Tht was up from 12.2 in December and the highest reading ever.

* The median price of a new home dropped 9.9% to $201,100 from $223,200 in December. That was also a decline of 13.5% from $232,400 in the year-earlier period. New home prices are now at the lowest level since December 2003 ($196,000).

We got a real one-two punch of dismal housing data this month, with today's new home sales report looking just as ugly as yesterday's existing home sales release. Not only did the pace of sales fall to the lowest level since at least 1963, but a key measure of supply exploded to a record high. The raw supply of homes for sale is clearly dropping. But because sales are falling even faster, we're not seeing any net improvement in the market. Result: Prices continue to fall, with new homes now going for the least in more than five years.

It really does all come down to jobs, jobs, and jobs. Lower mortgage rates are nice. Tax cuts are nice. But with the labor market deteriorating so sharply, we're unlikely to see a meaningful improvement in the housing market. If anything, sales and pricing will deteriorate further.

Jobless claims soar, durable orders tank

The parade of dismal economic data continues. Just this morning, we learned that January durable goods orders plunged 5.2%, much worse than the 2.5% drop economists were expecting. Orders have fallen for six months in a row, the longest stretch since the Commerce Department started tracking in 1992.

Meanwhile, December's reading was also revised sharply lower, to -4.6% from -2.6%. Orders ex-transportation fell 2.5%, worse than the 2.2% expectation. And nondefense capital goods orders, excluding aircraft (a key measure of core business spending), plunged 5.4% after a 5.8% decline in the prior month.

And what about the job market? Ugh. Initial jobless claims soared to 667,000 in the week of February 21 from 631,000 a week earlier. That was well above the 625,000 forecast and the highest going all the way back to 1982. Continuing claims set a fresh record of 5.112 million, up from 4.998 in the previous week.

Wednesday, February 25, 2009

Existing home sales drop 5.3% in January to record low

We just got the existing home sales figures for January. This is what they showed:

* Existing home sales fell 5.3% to a seasonally adjusted annual rate of 4.49 million from 4.74 million in December. That was much worse than the forecast for a reading of 4.79 million and the lowest level on record. Single-family sales dropped 4.7%, while condo and cooperative sales tanked 10.2%. Speaking of SFH sales, they were the lowest since August 1997 (a tie at 4.05 million).

* The raw number of homes for sale dipped 2.7% to 3.6 million units from 3.7 million in December and 4.16 million a year earlier. The months supply at current sales pace indicator of inventory climbed to 9.6 from 9.4 a month prior and 10.2 in January 2008.

* The median price of an existing home fell 3.1% to $170,300 from $175,700 in December. That was also off 14.8% from $199,700 in the year ago period. That leaves existing home prices at the lowest level since March 2003 ($169,400) -- almost six years ago.

Another false dawn? That's what December looks like, considering the dismal performance of the existing home market last month. Sales fell at a much faster rate than forecast, with combined sales of single-family homes now plumbing depths unseen since 1997. Prices tanked almost 15% from last January, leaving the median price of an existing home at a level unseen since March 2003 -- almost six years ago.

The list of challenges for housing is long, and familiar, at this point. Tighter mortgage lending standards and falling confidence are clearly on it. Yet the biggest challenge of all is job security. You can take steps to manipulate interest rates, which the Federal Reserve is doing. You can tout rising home affordability. You can try to minimize foreclosures to stem the flood of supply hitting the market. But if Americans are worried they won't have a job next month, next quarter, or next year, you've got a real problem. It doesn't matter if mortgage rates are 3% or 8%. People just aren't going to buy many houses.

The one potentially encouraging trend? The raw supply of homes for sale dropped from year-ago levels for yet another month. We'll have to see if that trend continues. Inventory is already down sharply in the new home market, and if the existing home market can follow suit, it will eventually help stabilize pricing. Unfortunately, we're still oversupplied to the tune of more than a million homes -- proof positive the healing process will take time.

Tuesday, February 24, 2009

Consumer confidence plunges to lowest level ever

Now THAT was a 2X4 across the face. I'm talking about the Consumer Confidence report from the Conference Board. It plunged to 25 in February from 37.4 in January. That was far, far worse than the 35 reading that economists were looking for and the worst reading in recorded history (which stretches back to 1967).

The present situations index dropped to 21.2 from 29.7, while the index that measures expectations about the future fell to 27.5 from 42.5. Readings on employment deteriorated substantially, with many more respondents characterizing jobs as "hard to get." Buying plans for automobiles and housing both declined, though the percentage of Americans who said they plan to buy appliances ticked up.

Long bond futures are at their day's high in the wake of this news (+1 5/32 to 129 2/32). Ten-year note yields are down about 4 bps to 2.72%.

S&P/Case-Shiller: Home prices down 18.6% YOY in December

We just got the December data from S&P/Case-Shiller on home prices. The research group says home prices dropped 2.52% between November and December in 20 top U.S. metropolitan areas. That was a larger increase than the 2.25% drop we saw a month earlier.

On a year-over-year basis, prices dropped 18.6% in December, a slightly deeper decline than the 18.2% drop in November and the biggest decline on record. The largest YOY drops could be found in Phoenix (-34%), Las Vegas (-33%), San Francisco (-31.2%), and Miami (-28.8%). Every single market showed a decline, with the most moderate drops (again) found in Denver (-4%) and Dallas (-4.3%).

The deterioration in U.S. home prices continues apace, with the rate of decline picking up steam late last year. Rising foreclosure activity is putting pressure on prices, as lenders are increasingly pursuing a "take what we can get" selling strategy.

Meanwhile, slumping consumer confidence and increasing unemployment are pressuring sales. That pressure is causing the declines to broaden out -- from former bubble markets to just about every market in the U.S. Indeed, the latest quarterly price data from the National Association of Realtors showed median prices falling from year-ago levels in 134 out of 153 metropolitan statistical areas in the fourth quarter of 2008. That's 87.6% of the nation's markets, up from 78.9% in the third quarter.

Nationalization chatter turned up a notch as banking bailout plans morph ... again

The bank nationalization chatter continues to increase in volume. Meanwhile, the government's bank bailout plans continue to morph in form and scope. The latest development? The government is moving toward converting preferred share stakes in banks into common shares. More about the process comes from the Washington Post below ...

"The change paves a road toward nationalization for the most troubled large banks. The government this week will begin a series of "stress tests" on 20 of the largest banks with $100 billion in assets to determine how much more capital these firms need to withstand an extreme recession.

"Companies deemed to need more money will be required to raise it from private sources, or else accept additional government investments. If those investments are converted into common shares, even a relatively modest infusion of taxpayer money could give the government majority control of many banks because their stock prices have plummeted in recent months. The total value of Citigroup's outstanding shares, for instance, is less than $12 billion.

"Administration officials said the goal of the revised program is to give banks a short-term boost that avoids the need for a more dramatic federal intervention.

"What Treasury Secretary Timothy F. Geithner and his team want to avoid is an explicit takeover that would put the government in charge of running banks. But some senior officials have said that, as a last resort, they would consider taking temporary control of large banks. The government also could take a majority ownership stake in a company without attempting to manage its daily operations.

Some more background on what's been done to date follows later in the story ...

"The government has invested almost $200 billion in more than 400 banks under a program created by former Treasury Secretary Henry M. Paulson Jr. In exchange, the government received shares of preferred stock that paid an annual interest rate of 5 percent for five years.

"The changes announced yesterday create a two-step process, officials said. Companies can replace the government's preferred shares with a new kind of preferred shares that will differ in at least one critical respect -- they can be converted into shares of the company's common stock. The company can request the conversion at any point during a specified period of several years, or else the shares will begin to gradually convert into common shares over time. If the company does not want to issue common shares to the government, it must buy back the government's preferred shares before the end of the period. Conversions will require the approval of banking regulators with final approval from the Treasury Department, a senior administration official said."

This Bloomberg story gives some more background on where things stand, as well.

Monday, February 23, 2009

CNBC and housing

Just in case you missed it, I did a segment this afternoon for CNBC on the housing market. It covered the latest mortgage bailout plan, plus a new mortgage payment insurance program from Toll Brothers. Toll will cover loan payments for borrowers who lose their jobs for up to six months, subject to certain conditions. Enjoy.

Bank regulators speak up on bank capital, nationalization

Given all the bank nationalization talk that's been floating around out there, it's no surprise the banking regulators are speaking up. A joint statement was just released on the issue of nationalization, bank capitalization, the proposed stress-testing process, and more. Here it is:

"The U.S. Department of the Treasury, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve Board today issued the following joint statement:

"A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.

"We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment. Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital.

"Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands."

One last point: "Rent" is not a four-letter word

I probably received more feedback on my Obama mortgage plan comments -- both here at this blog and in other venues -- than on any other topic. Good. I'm glad to see people are engaged on this issue.

Judging by a few of the comments, however, I think I need to elaborate on one point: I understand that foreclosure can be a traumatic experience. And I am not suggesting that anyone who loses his or her home to foreclosure just be thrown out on the street, given no aid whatsoever, and be forced to live under a bridge. What we do need to do, however, is focus less on keeping people in unaffordable, purchased homes encumbered by an unsustainable debt burden -- and more on just ensuring people have shelter, even if that shelter is RENTED shelter.

For some reason, RENT became a four-letter word in recent years. That shouldn't be the case. There is nothing wrong with renting a house, condo, or apartment, if you can't afford to buy -- or can't afford to stay in your home because you have a mortgage that is killing you, or that is secured by an asset whose value has plunged. Perhaps instead of providing huge subsidies to the mortgage industry, we should consider directing money toward making the transition into more affordable rental housing easier. Just a thought off the top of my head, but we could provide a Housing Opportunity Voucher that would cover the cost of first month's rent, last month's rent, and security deposit for people who lose their homes to foreclosure, but don't have enough money to cover the initial costs associated with finding rental shelter.

Stated another way, the reality that often gets obscured in this debate is that people who lose their OWNED homes have plenty of housing alternatives. We are not a country that's starved of housing units, be they single-family properties, condos, or apartments. And we are not in a market where former borrowers are going to have to pay through the eyeballs to get a new place.

Just consider: The nationwide rental vacancy rate was 10.1% in the fourth quarter of 2008, up from 9.6% a year earlier and just shy of the 2004 high of 10.4%. That level was the highest in the 49 years the Census Bureau has been tracking the data. Figures from the National Multi-Housing Council's confirm the rental market is extremely soft. The NMHC's market tightness index came in at a paltry 11 in the January survey, down from 24 a quarter earlier and the lowest in seven years.

Bottom line: Former homeowners should have no trouble finding rental space at great rates. In the meantime, for those who can't, we could re-direct more money from mortgage subsidies to programs that strengthen our nation's safety net (unemployment insurance, rental vouchers, funding for community groups that feed, clothe, and shelter the homeless, and so on).

Thursday, February 19, 2009

Jobless claims surging, Philly Fed a disaster

The latest economic news ain't so good, to put it mildly. Initial jobless claims came in at 627,000 in the week of February 14, above forecasts for 620,000 and just shy of the cycle high of 631,000 from late January. Continuing claims rose to 4.987 million from 4.817 million -- a fresh record high for the series, which goes all the way back to 1967.

Meanwhile, the Philadelphia Fed index plunged to -41.3 in February from -24.3 in January. That was far worse than the average forecast for a reading of -25 and the lowest reading since October 1990 (-48.2). Subindices tracking new orders, employment, and shipments all fell sharply, though in a bit of a silver lining, the index measuring expectations about the next six months rose to 15.9 from 7.4 a month earlier. That's the highest level since September.

Wednesday, February 18, 2009

An example of why principal reductions are inevitable in hard hit markets

I have talked an awful lot about principal balance reductions. But I decided today to put my time to use coming up with an illustration about why they're all but inevitable in hard-hit markets. I'm going to start in my own backyard, Palm Beach County, FL.

Let's say you bought a median priced home in the West Palm Beach market in December 2005, around the peak of the market. It would have cost you $408,200 at the time, according to Florida Association of Realtors figures available here). Let's be generous and assume you put 10% down, rather than finance with some 80/20 scheme. You would have had to cough up $40,820 and finance $367,380 -- leaving you with a mortgage with an initial LTV of 90%. Thirty-year fixed rates were around 6.3% at the time, so your payment (principal and interest only) would have been $2,273.98.

As of December 2008, just three years later, the median price of a West Palm Beach home is $246,000 (again, going from FAR data that's available here). That means your home would have lost $162,200 in value, or 39.7%. During that same three-year period, you would have only paid your mortgage principal down to $353,738.60 (about $13,600, or 3.7% of the original balance).

You would have $54,461.40 in equity, or a 13.3% equity position, assuming the original home did not lose or gain any value in the interim. Stated another way, your LTV would have declined to just under 87%, and the new Fannie/Freddie 105% LTV break would give you some relief.

But as I said earlier, prices haven't stayed the same. They've plunged almost 40%. That means you now have a mortgage with an LTV ratio of 143.8% (!) As you can see, even a more generous 105% LTV limit doesn't help you refi in a market like this one. And a $5,000 subsidy over five years doesn't do much to offset a $162,000 decline in value, much less incentivize you to stay put. This is why principal cramdowns/reductions are all but inevitable in hard hit markets -- Florida, California, and so on.

Oh and by the way, any guess how long it would take to get back to even (your original purchase price) on this hypothetical house -- assuming prices instantly turn around and rise 5% per year from the December 2008 level? Give up? More than 10 years. Your West Palm Beach house would finish 2018 at just under $401,000 and 2019 at around $420,700.

Details of Obama plan released, with my comments

The earlier post I put up was based on media reports. Now, the Obama administration has officially released its plan to reduce foreclosures. The details can be found here (PDF link). Let's get into the major components ...

The centerpiece of the program is designed to encourage loan modifications through government subsidies and payments -- payments that go to mortgage servicers, borrowers, and investors. Here are the details:

- A Shared Effort to Reduce Monthly Payments: For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income.

Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400. That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.

- "Pay for Success" Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive "pay for success" fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years.

- Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

- Reaching Borrowers Early: To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.

- Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration -- together with the FDIC -- has developed an innovative partial guarantee initiative. The insurance fund – to be created by the Treasury Department at a size of up to $10 billion – will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on.

Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index. These payments could be set aside as reserves, providing a partial guarantee in the event that home price declines – and therefore losses in cases of default – are higher than expected.

All told, it appears the government could end up paying as much as $10,500 to borrowers, lenders, and servicers in fees and subsidies per loan, as well as the undetermined cost of subsidizing the interest rate and/or covering the cost of reducing principal.

* The modification plan will not be accessible by speculators. In other words, it's targeted at owner-occupants vs. investors. It will only apply to mortgages under the conforming loan limit -- meaning no "jumbos." It appears the current conforming loan limits, rather than the limits in place when the borrower took out the loan, will be used to determine eligibility. The current Fannie Mae and Freddie Mac conforming loan limit is $417,000 nationally, and up to $729,750 in areas designated "high cost."

* Borrowers will potentially qualify for a modification if they have elevated mortgage debt to income ratios (38% or greater) OR they are underwater on their loans (including any first and second mortgage debt). They do not have to be currently delinquent on their payments.

* Anyone who is tagged for the program -- and who has a total debt-to-income ratio of 55% or higher (meaning, if you add their mortgage payments to payments on credit cards, auto loans, and so on, it consumes more than 55% of gross income) -- will be required to attend a debt counseling program in order to get a mod. Loan modifications will not be allowed to cut a borrower's interest rate to less than 2%.

A sheet with various examples of how this would work can be found here (PDF link).

Fannie Mae and Freddie Mac will also see some changes as part of this program. Here is what is happening there ...

* The Treasury Department will double the amount of money it has committed to inject into Fannie Mae and Freddie Mac (via the purchase of preferred shares) -- to as much as $400 billion from $200 billion. The two GSEs will also be allowed to increase the size of their retained loan portfolios to $900 billion from $850 billion currently. The government had previously said the agencies would be allowed to modestly increase their portfolios through the end of this year, then reduce them by 10% a year starting in 2010 in order to reduce systemic risk.

Moreover, borrowers who are upside down -- owing more than their houses are worth -- may be able to refinance going forward. How?

* Fannie and Freddie will be allowed to refinance mortgages they hold -- or that they put into MBS -- as long as the new loans (including any refi fees) don't amount to more than 105% of the current value of the underlying homes.

* Borrowers can participate in this program if they have a second mortgage, but only if the second mortgage lender agrees to stay in second position. The refi loans will feature fixed rates with terms of 15 or 30 years, with no prepayment or balloon payments. Applications won't be accepted until March 4, when details of the program are released.

What about the potential impact of these two programs? Here is the administration's take on that ...

* The administration says this plan will help 7 million to 9 million families either restructure their loans or refinance them. The breakdown suggests 4 million to 5 million homeowners will be able to refinance, while 3 million to 4 million will be helped by the modification program. The administration says the plan will prevent house prices from declining an additional $6,000 (above and beyond the declines they're already are suffering due to the economy).

The government is also going to try to make loan modifications more uniform across the mortgage industry. More details follow ...

*All banks receiving Financial Stability Plan (meaning, TARP) aid from here on out will be forced to implement a uniform loan modification program. This program will likely follow the blueprint of the FDIC's "Mod in a Box" program, as well as current modification programs being pursued by Fannie and Freddie. The government will seek to apply any modification program to FHA and VA loans, in additional to conventional loans owned or guaranteed by the GSEs. Details of the guidelines will be released before March 4.

What about the very important question many of us has raised: Will borrowers see their principal balances cut?

* That's permitted under the plan, but not the focus of the administration's effort. Borrowers will more likely see term extensions and interest rate cuts.

* Meanwhile, the Obama administration will back legislative efforts to allow bankruptcy judges to cram down mortgage balances. Specifically, the administration prefers that any legislation allow judges to treat any mortgage amount due above and beyond the current value of the borrower's home to be split out and considered unsecured debt. A payment plan for that unsecured amount can be worked out, just like you'd see with other unsecured debts.

* Finally, the Hope for Homeowners plan will be modified, with the FHA cutting fees that borrowers have to pay and loosening standards so that borrowers with higher debt burdens can qualify, among other things.

UPDATE: So now we have the details of Obama's plan. The big question is, Will this latest plan work? What are the pitfalls? Well, I have to say I like a few principles that are included here.

First, the mortgage lender/investor appears required to take the "first hit" on whatever modification would get the borrower's payment down to a 38% DTI ratio. Then the government shares the cost for the next seven percentage points.

Second, the program is targeted at buyers who aren't yet delinquent on their loans, but may end up in that category. This eliminates the whole "My lender won't talk to me until I miss three payments" problem.

Third, borrowers will receive up to $5,000 in principal reduction payments from the government over time. The idea is to help incentivize borrowers who are upside down to stay put during the period they are upside down, but paying at the reduced rate.

So what are the flaws? Well, this only applies to owner occupied homes with loans under the conforming loan limit. Some 40% of existing homes sold during the peak of the bubble -- 2005 -- were purchased as second homes or investment properties, according to the National Association of Realtors. Jumbo loan delinquencies are also rising quickly. Any foreclosures there would not be mitigated by this plan. That's understandable from a political standpoint (officials don't want to be seen bailout out the speculators or the rich). But it also limits the plan's impact.

Another troubling aspect of this plan is the provision that would allow Fannie Mae and Freddie Mac to refinance borrowers into new loans with LTVs of up to 105%. Waiting and hoping for a home price rebound -- and refusing to just go ahead and foreclose on loans where borrowers have fallen behind and are upside down -- has proven to be a losing strategy. It's akin to kicking the can down the road, and it has resulted in billions and billions of dollars in industry losses.

Now, rather than cut their losses short, Fannie and Freddie will be allowed to refinance these outstanding mortgages into new lower-rate loans that feature LTVs of 100% or more. A portion of the new loans will effectively be unsecured as a result. That exposes Fannie and Freddie to potentially larger losses down the road if home prices don't rebound and/or if borrowers just end up defaulting anyway. That, in turn, could result in some additional risk being priced into the GSEs' cost of funds.

Bottom line: Taxpayers could ultimately get soaked here if home prices don't rise in the coming few years. Those losses would come on top of any possible losses stemming from the recent surge in FHA loan volume. FHA, unlike most private lenders these days, still writes loans at LTVs as high as 97%, a significant risk in an environment of falling home prices and rising unemployment.

Furthermore, the plan still doesn't attack the principal reduction issue head on. Lenders and servicers may voluntarily apply any government aid toward principal reductions. But it appears term extensions and rate reductions will be the main technique used to reduce payments to the 38% and 31% thresholds. The Obama administration is hoping that the threat of bankruptcy cramdowns will inspire lenders to act. But that remains to be seen.

Moreover, in many hard-hit markets (the same ones where foreclosure rates are the highest, including Florida and California), the home price declines are extremely severe. A $5,000 principal reduction incentive payment, spread out over five years, likely won't be enough to incentive those borrowers to stick around should hardship strike.

And even if they do, what happens when these borrowers want to move? It took several years for borrowers in regional markets like New England and California to get back to breakeven during previous busts, assuming they purchased at or near the market peaks. With foreclosure and/or a principal write-down, the debt they can't pay back or that exceeds the value of their current home gets wiped away. They are then free to rent for a while and buy a new home later.

Under this plan, it doesn't look like the debt they owe in excess of their current home's value will typically be wiped away. That means they're going to have to come up with large amounts of money when they eventually want to move. That would be covered if home prices rise substantially. But again, we're talking about borrowers who are deeply underwater -- and who will likely remain so for years. More than likely, many of these borrowers will stay put, depressing home sales activity in hard hit markets going forward.

Last but not least, there is the whole moral hazard argument. The government could end up subsidizing mortgage borrowers, lenders, and servicers to the tune of more than $10,000 as part of this program. How is that fair to borrowers who played by the rules ... who didn't buy too much house ... and continue to pay their loans on time? Why are they left out in the cold? That's what many Americans are going to be asking, and what many politicians are going to be hearing from callers.

I would also like to point out, in closing, that market forces ARE working. Foreclosures are actually resulting in overpriced homes burdened with too much debt being moved into the hands of new buyers, who are paying drastically reduced prices. They can therefore purchase using a traditional mortgage. In markets where prices have fallen the most, home sales are currently rising smartly. Delaying and dragging out the downturn by artificially propping up home prices will arguably work against the market healing, even if it makes us all feel good for doing "something."

January housing starts fall off the table ... again

The latest figures show housing starts and permits continue to fall off the table. A few details from the January report:

* Total housing starts plunged 16.8% to a seasonally adjusted annual rate of 466,000, down from a revised 560,000 in December. Building permits dropped 4.8% to 521,000 from 547,000. Economists were expecting 529,000 starts and 525,000 permits.

* Housing construction activity has now plunged 79.5% from its January 2006 peak (2.273 million), while permit activity has dropped 77% from its September 2005 high (2.263 million). These are the lowest readings in the history of the Census Bureau data, which goes back to 1959.

* By property type, single family starts slipped 12.2% from December, while multifamily starts plunged 27.9%. Single family permits were down 8%, while multifamily permits inched up 1.6%.

* Regionally speaking, starts dropped in all four sectors of the country -- down 42.9% in the Northeast, down 29.3% in the Midwest, down 12.8% in the South and down 6.4% in the West. Permits also fell in all four quadrants -- off 3.3% in the Northeast, down 2.4% in the Midwest, down 6.9% in the South, and down 1.8% in the West.

More on the Obama foreclosure plan

Today is the big day that the Obama administration releases its mortgage foreclosure prevention plan. Based on the various advance news reports out there, here are some details on how this program will work (along with where the details came from):

* The government will provide incentive payments to mortgage servicers in an attempt to encourage them to modify more loans, and to offset losses suffered by mortgage investors and lenders who own the loans being modified. The total amount to be dedicated to the effort is estimated at $50 billion, with the money coming from leftover TARP funds. The subsidy would reportedly amount to $800 to $1,000 per loan (Wall Street Journal).

* Loan modifications would typically involve an interest rate reduction or an extension of the loan's term. Servicers may be protected against lawsuits from investors; fear of being sued has prevented many servicers from aggressively modifying loans (WSJ).

* There will be some method established to allow upside down borrowers to refinance their mortgages. Currently, borrowers can't refinance if they owe more than their homes are worth. Fannie Mae and Freddie Mac would assist with this process, which would be open only to those still current on their payments. But it isn't clear how (WSJ).

* The idea is to reduce a borrower's mortgage payments to 31% of gross (pre-tax) income (Bloomberg, NY Times)

* Borrowers do not need to be delinquent already to qualify for a modification (Bloomberg).

* The plan is voluntary for lenders and investors, not mandatory (Bloomberg).

* The administration will back legislation in Congress to allow bankruptcy judges to cram down principal on home mortgages. It also wants authority for FHA and VA loans to be modified, something not currently allowed (Bloomberg). But the plan does not appear to include a method for explicit principal balance reduction, relying instead on the implicit threat of a court cramdown to prod servicers into action (WSJ).

* Borrowers would eventually be required to make up the difference between what they currently pay and what they are allowed to pay in a modification. This difference would be covered by any presumed rise in house prices between now and the time they refinance the loan or sell the house (WSJ).

Tuesday, February 17, 2009

NAHB index ticks up in February as "tire kickers" step in

The National Association of Home Builders released its latest Housing Market Index survey this afternoon. Here's what the report showed ...

* The overall index ticked up 1 point to 9 in February. January's reading of 8 was a record low for the series, which dates back to 1985. A year ago, the index stood at 20.

* The subindex that measures current single-family sales rose to 7 from 6, while the subindex measuring expectations about future sales dropped to 15 (a record low) from 17. The subindex that measures prospective buyer traffic climbed to 11 from 8, its highest reading since October.

* Regionally, the index dipped 1 point to 9 in the Northeast. But it rose 2 points to 8 in the Midwest, inched up 1 point to 12 in the South, and climbed 1 point to 5 in the West.

It looks like a few more "tire kickers" were active in the housing market in February. I say that because buyer traffic climbed to the highest level since October, according to the NAHB, but actual sales barely budged.

Clearly, housing affordability is on the rise thanks to a combination of lower home prices and relatively cheap mortgage rates. But getting a buyer to put pen to paper is extremely difficult in this environment. Americans are concerned -- rightfully so -- about losing their jobs. They're also hesitant to buy a house now because they're afraid it will be worth less six months or a year later. Before we see a true, lasting turnaround in housing demand, we'll need to see some stabilization in the employment situation and a restoration of buyer confidence. And unfortunately, that doesn't seem to be forthcoming any time soon.

Strange things are afoot at the Circle K

Those of you who remember the movie "Bill & Ted's Excellent Adventure" know where I'm getting that headline from. In a financial context, though, I'm referring to the moves I'm seeing in several areas of the currency and bond market this morning. Most notably, the Dollar Index is breaking out to the upside (+89 ticks to 87.55) and the 2-year swap spread is blowing out (+15 basis points to about 73 bps as I write). These are "yellow alert" signals that suggest something is awry in the credit markets again. Take notice.

I should also note that the cost of 10-year CDS on U.S. government debt continues to increase, touching a record-high 88 bps on Friday. This recent post explains the potential causes and effects of this development. Finally, gold continues to rise -- with the yellow metal up about $28 an ounce in the spot market last I checked.

Friday, February 13, 2009

Foreclosure moratoriums abound ... but do they work? Plus, more on modifications

The "foreclosure moratorium" wave sweeping through the mortgage world continues to pick up momentum. Just today, JPMorgan Chase, Morgan Stanley and Citigroup announced they would halt home foreclosures through March (the 6th for JPMorgan and the 12th for Citigroup) -- or until the Obama administration rolls out its latest foreclosure prevention plan.

For JPMorgan, no new owner occupied loans will be put into the foreclosure pipeline. Citigroup is applying its halt to Citi-owned first mortgages (and loans Citi services if it has "reached an understanding with the investor") only. It says it will neither complete any foreclosures in the pipeline nor initiate new ones.

You may recall that Fannie Mae began suspending foreclosure sales late in 2008, saying it would work more closely with mortgage services to implement a streamlined loan modification program. The program is targeted at borrowers who are 90 days past due, and it's designed to modify their loans by lowering their interest rates, extending their loan terms, or deferring payments on some portion of their loan principal balances.

Finally, several states have implemented or are considering different types of foreclosure moratoriums, most notably California.

But do these moratoriums really work? My sense is no, not in most cases in today's economic environment. Here's my thinking ...

If the problem is simply that a mortgage servicer is understaffed and overwhelmed with work, then maybe a moratorium does some good. It allows for more attempts to reach borrowers by phone, email, mail, or in person. And if the problem with the underlying borrowers is the STRUCTURE of their underlying loans, then it might do some good.

An example would be so-called "exploding ARMs" -- think 2/28 subprime ARMs here. With those kinds of loans, you might be able to modify them by freezing the rates and payments at the starting levels spelled out in the loan contracts. A moratorium/pause would give both borrowers and servicers the time necessary to work out deals, to provide and verify the necessary asset and income information proving the proposed loan modifications will work, and so on.

But today's foreclosures are being driven by two entirely different forces: Rising unemployment and falling home values. It's not the LOANS (the way they're structured) that are the problem per se. It's that the collateral backing the loans is depreciating and the capacity of borrowers to pay is going down. These trends are leaving more borrowers upside down (owing more than their homes are worth), giving them a perfectly rational reason for walking away. And it's leaving many borrowers without enough income to make their loan payments, no matter what their interest rates or loan terms.

In this environment, stretching out the foreclosure timeline merely prolongs the inevitable. The borrower who loses his job may be better off just getting out from under the house and "moving in with mom" or temporarily renting at a lower monthly cost until his income prospects improve. That's a tough pill for some politicians to swallow, but it happens to be the truth.

Meanwhile, delaying foreclosure in a market where the underlying collateral is losing value is problematic. In simple terms, you can foreclose now and sell a repossessed property for $200,000. Or you can wait out a 90-day moratorium and end up selling when you'll only be able to get $195,000.

Does it really make sense to defer foreclosures in this environment, or does doing so just increase the ultimate losses to lenders, investors, and the financial system? Personally, I'd argue that most moratoriums are a mistake. They don't appear to be slowing down filings permanently, either. When California halted foreclosure filings for a couple of months in the fall, they predictably declined. But filings spiked right back up again once the moratorium expired.

Meanwhile, on the loan modification front, the latest plan from the Obama administration seems to be to subsidize lenders who lower interest rates for mortgage borrowers. It's unclear precisely how this plan would work, though Reuters reported it will apply to borrowers who are not yet delinquent. They would have to have their properties reappraised and would have to prove they are burdened by excessive payments (i.e. their payments are consuming less than X% of their gross income, with X still to be defined).

But before we get too excited, it's important to note we already have several modification efforts underway. And they don't seem to be too successful. The OCC's own figures show very high redefault rates on loans that were modified in early 2008. That stems, in part, from deterioration in the underlying economic environment.

It may also be because modifications simply haven't been aggressive enough. A paper from Alan W. White, a professor at Valparaiso University, found that in a majority of modifications involving subprime and Alt-A loans, lenders are actually INCREASING the total amount of debt borrowers owe -- and RAISING their payments -- rather than lowering both. Some 65% of mods resulted in either the same monthly payment (20%) as the loan originally carried, or a larger one (45%).

How can that be? Many modifications don't involve cancelling the overdue interest and principal payments. Instead, those amounts are added to the loan balance and the entire loan is reamortized. Another finding from that paper, by the way? That loss severities are high and rising. In White's words: "Loss severities increased steadily throughout 2007 and 2008 and are expected to worsen in 2009." That underscores my earlier point that delaying foreclosure just ends up costing the system more money.

If we ARE going to push foreclosures off, then let's make sure lenders and servicers use the time wisely. Don't just let them dilly-dally around with "mushy" modifications. Encourage them to reduce loan principal for troubled borrowers to reflect the very real fact that home prices have fallen sharply. Doing so will give borrowers more incentive to stick around and make their newly reduced payments they no longer feel hopelessly underwater.

Thursday, February 12, 2009

30-year Treasury Bond auction not so hot

The Treasury just sold $14 billion of 30-year bonds. The auction wasn't terrible, but it wasn't so hot, either. Pre-auction talk was for the bonds to sell at a yield of 3.51%. Instead, they sold at 3.54%. The bid-to-cover ratio came in at just 2.02, compared with 2.07 at the last auction and an average of 2.18 over the past 10 sales. Indirect bidding was strong, however, with such bidders scooping up 33.9% of the auction. That was better than the 10-auction average of 27.9% (and up significantly from November's 18.2%).

Long bond futures dropped to the day's low after the results came out. They were recently down 25/32 to 127 30/32.

Retail sales rise ... Jobless claims top 600,000 again ... Tax breaks for home buying and car buying slashed

Good Thursday morning. A few things are catching my eye in the early going ...

* Retail sales popped 1% in January, and 0.9% if you exclude autos. Those readings were better than expectations for readings of -0.8% and -0.4%, respectively. There was some relative strength in categories like food and clothing, as well as gasoline (reflecting higher prices on the month).

* On the other hand, initial jobless claims filings came in at 623,000 against expectations for a reading of 610,000. Last week's number was revised up to 631,000 from the 626,000 previously reported. Continuing claims climbed to 4.81 million, the highest level since the government started tracking in 1967.

* Tax provisions that apply to the housing and auto markets were reportedly curtailed sharply in the House-Senate stimulus negotiations. An $11 billion tax cut for the auto industry was slashed to just $2 billion. Instead of being able to deduct car loan interest when purchasing a new car, buyers will now just be able to deduct state and local taxes.

Meanwhile, a provision targeted at home buyers was slashed from $15,000 to $8,000. That’s not much more than the existing $7,500 credit that’s already being offered ... and that has failed to boost home sales.

Another provision that was going to allow corporations to use losses they’re racking up today to offset profits they earned as far back as five years ago was also cut dramatically. It’ll now be available only to small businesses that generate revenue of less than $5 million a year, according to the Wall Street Journal. The original provision stood to benefit home builders, because they could use the losses they’re generating now to get big refunds on the taxes they paid during the housing bubble.

Wednesday, February 11, 2009

10-year Treasury demand weak

Yesterday's 3-year Treasury Note auction went pretty well. Today's $21 billion sale of 10-year Notes? Not so much. Pre-auction talk was for the notes to sell at a yield of about 2.79%. Instead, they sold at 2.82%. The indirect bidder percentage was 37.8%, relatively high compared with recent levels and the last auction's 17.7%. But the bid-to-cover ratio was a paltry 2.21, down from 2.59 at the previous auction and at the low end of the recent range.

MBA data shows refi plunge, lowest purchase activity in 8+ years

The latest Mortgage Bankers Association figures show both refinance activity and home purchase activity falling sharply. The refinance index plunged 24.5% on the week to 600.6, its lowest level since late November. Meanwhile, the home purchase index dropped 9.8% to 235.9.

That is the lowest level for purchase loan applications going all the way back to the final week of December 2000. If you exclude that week, which appears to be an anomalous spike lower, (the MBA figures sometimes show large swings around the holidays due to the difficulty of seasonally adjusting the figures at that time of year), you have to go all the way back to February 1999 to find a weaker reading.

A couple of things are going on here:

First, the roll out of all the recent bailouts has spooked investors in the bond market. They are concerned about the enormous cost of both the economic stimulus package and the potential bank bailout. They see the government may need to raise a net $2 trillion to $2.5 trillion this year via sales of Treasury bills, notes, and bonds. So they've been selling Treasuries. That drives prices lower and yields higher. And since Treasury yields are used as a benchmark to set other rates, we've seen some upward pressure on mortgage costs.

Second, the economy continues to deteriorate. We've lost almost 600,000 jobs EACH month since November. Consumer confidence has continued to deteriorate. And home prices have continued to decline. All of those factors are spooking potential home buyers, and keeping many of them on the sidelines. Cheap financing and home buying tax credits from Washington may spur some activity. But the underlying housing market fundamentals remain extremely weak. So mortgage activity will likely stay subdued as well.

Tuesday, February 10, 2009

Bailout rollout gets the Bronx cheer; Bernanke comments on the credit markets

If you're interested in the full text of Treasury Secretary Tim Geithner's speech from this morning, you can read it here. But I'll sum it up by saying that it contains a lot of talk, with few details. Everyone is kind of sitting around and asking, "That's it? No real details on the plan? No real idea of how these assets are going to be priced?" The market is not pleased, with the Dow down around 280 points at last count.

UPDATE: Here are Fed Chairman Ben Bernanke's comments on the Fed's credit support programs, recently posted on the web. I don't see anything really new here.

More on the bank bailout plan

So today is the big day. The Obama administration is putting a full-court press on for the bank bailout plan, and most of the details of the efforts are now hitting the tape in various forms.

One key component will be expansion of the TALF program, which is designed to light a fire under the asset backed securities market. As the Wall Street Journal notes this morning:

"The Treasury Department is leading the U.S. effort to design a revamped financial-rescue plan for damaged markets, but behind the scenes the Federal Reserve will play a key role in making it work.

"Fed loans stand at the center of an ambitious program meant to jump-start markets for consumer loans. Officials plan to expand the program in scope and substantially in size.

"The program, known as the Term Asset-backed Securities Loan Facility, or TALF, was announced in November but still hasn't gotten up and running. It originally was meant to provide $200 billion of financing to investors buying securities backed by consumer loans such as car loans, student loans and credit-card debt. Officials hope investor demand for the securities will translate into more credit for consumers.

"Now officials are looking to apply it to other markets, such as those for securities backed by commercial real-estate loans and "private label" mortgages that aren't tied to the big U.S.-backed mortgage finance firms Fannie Mae and Freddie Mac.

"The central bank has other roles in the bailout. But the planned expansion of the TALF program is likely the most consequential of its roles. The Treasury originally committed $20 billion as a cushion for the Fed against losses from the program. The Treasury could expand that cushion to $100 billion, giving the Fed room to lend much more."

The Journal also discussed how stress testing of banks will be an important component of any bailout plan ...

"Many U.S. banks will be subjected to rigorous examinations to see if they are healthy enough to lend before receiving additional financial aid, according to people familiar with the matter.

"The stress tests will be part of the bailout revamp to be announced Tuesday by Treasury Secretary Timothy Geithner. In addition to fresh capital injections into banks, the new approach will include programs to help struggling homeowners; a significant expansion of a Federal Reserve program designed to jump-start consumer lending; and a private-public partnership to relieve banks of bad assets.

"Mr. Geithner is expected to present the moves as a multi-pronged effort to encourage financial institutions to lend again. The administration's goal is to unfreeze dysfunctional credit markets that have dragged the economy into a recession. He will also announce new conditions on banks receiving aid, including documenting how the money is helping to generate new loans.

"The expanded effort could see as much as $2 trillion in financing flowing through the system, according to Congressional officials briefed Monday night. The expanded Fed facility and the "bad bank" could each reach $1 trillion in size, both of which would be seeded with bailout funds.

"The administration is discussing spending between $100 billion and $200 billion investing new funds in banks, up to $100 billion to expand the Federal Reserve facility and $50 billion to help homeowners. The Treasury wants to keep some money available in case of emergencies. These commitments could eat up much of the second half of the $700 billion bailout fund.

As for the cost and size of the program, those nettlesome details are still unknown. As President Obama said in last night's news conference: "We don't know yet whether we're going to need additional money or how much additional money we'll need until we've seen how successful we are at restoring a sense of confidence in a marketplace that the federal government and the Federal Reserve Bank and the FDIC, working in concert, know what they're doing."

The Washington Post discusses a total public and private price tag of perhaps $1.5 trillion. But reading between the lines, I don't think even the government has any idea what this will cost. More below ...

"Geithner plans to announce a public-private partnership that would seek to finance the purchasing of toxic bank assets that are at the heart of the credit crisis, officials and congressional sources said. These sources briefed by Treasury officials said the program may initially raise $250 billion to $500 billion in public and private funds to offer low-cost financing to encourage investors to buy the toxic assets. An administration official said the proposal is still subject to a public review and may not take final shape for several weeks.

"A second initiative will broaden the scope of a Federal Reserve program aimed at unclogging the markets for auto, student and other consumer loans. That initiative may expand to as much as $1 trillion, using $100 billion from the Treasury's rescue funds, and include aid for commercial real estate markets.

"A third program would offer direct help to the nation's largest banks. The government plans to conduct a review of major financial firms to determine how much they may need. Any federal aid would come with conditions that would give the firms incentives to pay the money back as soon as possible. The review would determine the ultimate price tag of this program.

"The primary goal of the bank-by-bank examination is to help regulators figure out whether these firms could withstand a downturn even worse than the current one, administration officials said."

Incidentally, the TARP name will also be buried. That part of the rescue program is now being dubbed ... drum roll please ... the Financial Stability Plan (FSP)! Does the name change mean anything? Of course not! But stirring the alphabet soup a bit is supposed to eliminate the memories of the dismal TARP planning and implementation process.

Monday, February 09, 2009

Bank bailout on a 24-hour hold; Details leak anyway

Good Monday morning! I'm back from New York and ready to resume normal posting here. The big news of the day has to be the 24 -our hold put on the latest bank bailout plan. It was slated to be released today; Now, Treasury Secretary Tim Geithner won't be rolling it out until Tuesday. The stated reason for the delay? So that everyone can focus on the economic stimulus package instead.

Of course, Washington is leakier than a sieve these days -- and most details of the package are already finding their way into the press.

Here's one update from the New York Times. It discusses how the government is trying to structure any bailout in such a way that private investors will help foot the bill:

"Wall Street helped produce the global financial and economic crisis. Now, as the Obama administration prepares to unveil a revised bailout plan for the banking system, policy makers hope Wall Street can be part of the solution.

"Administration officials said the plan, to be announced Tuesday, was likely to depend in part on the willingness of private investors other than banks — like hedge funds, private equity funds and perhaps even insurance companies — to buy the contaminating assets that wiped out the capital of many banks.

"The officials say they are counting on the profit motive to create a market for those assets. The government would guarantee a floor value, officials say, as a way to overcome investors’ reluctance to buy them.

"Details of the new plan, which were still being worked out during the weekend, are sketchy. And they are likely to remain so even after Treasury Secretary Timothy F. Geithner announces the plan on Tuesday. But the aim is to reduce the need for immediate federal financing and relieve fears that taxpayers will pay excessive prices if the government takes over risky securities. The banks created those securities when credit and home prices were booming a few years ago.

"Besides devising a way to bring private investors into the bank bailout, the Treasury plan is expected to inject more capital into some banks and to give many homeowners relief from immediate foreclosures."

As for other possible plan elements, the Wall Street Journal weighed in on several of them today:

"An expansion of the Fed's Term Asset-Backed Securities Loan Facility to include assets beyond the student-loan, auto-loan and credit-card debt it was set up to absorb. Under the revamp, the so-called TALF is likely to buy securities backed by commercial real estate and possibly other assets as well. The program was set up during the Bush administration to spur the consumer-loan market by providing financing for investors to buy securities backed by such loans.

"A second round of cash injections in financial firms but with tougher terms, such as a requirement to modify troubled mortgages and better track the federal funds. The government is looking to get money into banks by buying preferred shares that convert into common shares in seven years; the idea is to avoid diluting current shareholders' stakes while helping banks better withstand losses. The Treasury may also allow banks that have already received capital to convert the Treasury's preferred shares to common stock over time.

"Giving the Federal Deposit Insurance Corp. power to help dismantle troubled financial firms beyond the depository institutions over which it now has authority. This could require legislation.

"Mr. Geithner, his predecessor Mr. Paulson and Fed Chairman Ben Bernanke have said there needs to be a government entity empowered to wind down failed financial institutions that aren't banks. Regulators have said one problem the government faced when Lehman Brothers Holdings Inc. and American International Group Inc. ran into trouble was that no federal body had authority to step in and steer the firms toward an orderly demise.

"Having the FDIC guarantee a wider range of debt that banks issue to fund loans is also a likely element of the plan, said people familiar with the matter. The guarantees could help free up credit to both companies and consumers. Currently, the FDIC temporarily backs certain debt with a three-year maturity. Government officials could increase this to maturities up to 10 years.

"More help for homeowners, at a cost of between $50 billion and $100 billion. The administration is expected to create national standards for loan modifications that would be adopted by mortgage giants Fannie Mae and Freddie Mac. The plan could include a mechanism to determine the value of homes facing foreclosure, which could speed negotiations with borrowers. The difficulty of valuing such homes is one reason many loan-modification efforts have stalled.

"A related move would see the government using taxpayer dollars to give mortgage companies an incentive to modify loans. One idea would help reduce interest rates for consumers by having the government match mortgage companies' interest-rate reductions to some degree. For instance, if a mortgage company agreed to shave one point off the rate on a loan, the government might match that so the rate would be reduced by two points. Mr. Geithner is also expected to express support for legislation that would allow judges to modify the terms of mortgages in bankruptcy court."

Of course, the COST of all these bailouts is continuing to unsettle the Treasury bond market -- a trend I have discussed many times in many venues. The long bond futures are off ANOTHER 13/32 as I write. At a price of just over 125, they're down almost 18 points since mid-December.

The cost of insuring Treasury bonds against default in the derivatives market continues to rise, too. Credit default swaps on U.S. 10-year notes traded up to 82 basis points on Friday, according to Bloomberg data. That’s a fresh high, and a large increase from the late-2007 low of 7 basis points.

Stated another way, it now costs $8,200 to insure $1 million in 10-year notes against default, up from $700. That's still peanuts compared with many private credits. But the trend is clear: Investors are downgrading their assumptions about the credit quality of the U.S. itself.

Wednesday, February 04, 2009

Some comments on housing and interest rates

I'm still mostly out of pocket on business. So in the absence of posts, I'm including a couple of links to videos that cover some of my thoughts about housing and interest rates. Here's one from the Wall Street Journal, one from BNN TV, and one from CNBC Asia.

Tuesday, February 03, 2009

Limited posting this week

I'm in New York on business, so posting will be somewhat limited this week. Seems as good a time as any to hit the road, given we're still in a holding pattern as we wait for precise details of the latest bailout plan. Back in touch later.

Site Meter