Interest Rate Roundup

Monday, March 31, 2008

The latest on Lehman and Legg Mason

Some late-breaking news today ...

First, Lehman Brothers is planning to sell 3 million shares of non-cumulative perpetual convertible preferred stock. That's a long-winded way of saying it's going to raise money in order to reassure the market that it has plenty of liquidity on hand. No word yet on the dividend rate the preferred shares will offer. Said Lehman:

"Given the challenging environment and our previously stated view that it will likely continue the balance of the year, issuing convertible preferred is appropriate as it optimizes our funding and accelerates our plan to reduce leverage, and at the same time minimizes dilution to our shareholders," said Erin Callan, managing director and chief financial officer of Lehman Brothers and a member of the Firm's executive committee. "We also felt this was the right time as there was a window of opportunity in the market, as we have received significant interest from several key institutional investors, who have been strong supporters of the Firm over time."

Second, the cost of supporting troubled money market funds is rising at Legg Mason. The firm said it has agreed to contribute capital to one of its funds if the fund loses money from the sale of asset backed commercial paper securities. The total cost of supporting its funds rose to $498 million (pre-tax) in the March quarter.

Dramatic regulatory overhaul coming

Get ready for a dramatic change in the way the nation's financial institutions are going to be regulated. That's the message coming from the Treasury Department, Congress, and other regulatory agencies. Plenty of real and digital ink has already been spilled on this topic, and it is a Monday morning. So rather than summarize everything myself, let me just share the crux of the plan from the Wall Street Journal today:

"Mr. Paulson's plan calls for changes in three distinct phases -- over the short, intermediate and long-term.

"Among the short-term recommendations, he advocates the creation of a Mortgage Origination Commission, which would monitor the adequacy of each state's supervision of mortgage lending. He argues that this could give states the incentive to improve oversight, as investors would avoid securities backed by mortgages from poorly regulated areas.

"Over the intermediate-term, the proposal recommends merging the SEC with the Commodity Futures Trading Commission, reflecting the blurred lines between securities and commodities. While the agencies cover very similar terrain, they also represent extremely territorial and powerful constituencies. Commissioner Bart Chilton of the CFTC is already cautioning against any hasty moves.

"I think most Americans would prefer that government do our jobs and that means doing everything possible to cauterize the subprime mess before performing major surgery on a regulatory system, parts of which are still very healthy," he said.

"Over the long term, Mr. Paulson advocates a new, and instantly controversial, role for the Federal Reserve. Mr. Paulson sees the central bank eventually taking on the role of a "market stability" sheriff. This would move the Fed away from direct bank supervision, something the central bank has always argued is vitally important. A new entity would take that over. Instead, the Fed would use a broad authority to monitor any company or any business line that could destabilize financial markets.

"They would have broad powers so they could go anywhere in the system they needed to go," Mr. Paulson said. That would detract from the SEC, which is supposed to perform part of that role today. Indeed, in the Treasury's dream scenario, the SEC is effectively eliminated and its responsibilities divided up between a series of new agencies.

"A roving oversight role could ultimately leave the Fed as sole supervisor of nothing while being potentially liable for everything. Fed officials are in a delicate position over the plan. They do not want to explicitly endorse a report with which they have some important misgivings. They have argued they needed the authority, if they found a firm or firms acting in a way that endangered the system, to take firm measures to correct it, such as imposing a capital surcharge. The report does not explicitly give the Fed that power, but it does give it the power to take "corrective actions" in consultation with the other regulators."

You can read a more detailed summary of the report (PDF link) at the Treasury Department's web site, if you're so inclined.

Friday, March 28, 2008

Fremont facing more FDIC pressure

You remember Fremont General, right? The firm was a big subprime lender (and commercial real estate lender) during the boom days, and now, it has fallen on hard times. The company just announced that the Federal Deposit Insurance Corp. has warned Fremont about being undercapitalized and ordered it to take "prompt corrective action." A number of curbs have been imposed on its business as well. Here are some more details from Fremont's latest release:

"The Directive requires the Bank, the Company and FGCC to take one or more of the following actions to recapitalize the Bank within 60 days, or by May 26, 2008. The Directive provides:

-- The Bank shall sell enough voting shares or obligations of the Bank so that the Bank will be "adequately capitalized," as defined under the Federal Deposit Insurance Act and the related FDIC regulations, after the sale; and/or

-- The Bank shall accept an offer to be acquired by a depository institution holding company or combine with another insured depository institution; and

-- Fremont General and FGCC shall divest themselves of the Bank.

In the Directive, the FDIC has categorized the Bank as being an "undercapitalized" depository institution, as defined under the Federal Deposit Insurance Act and FDIC rules and regulations.
The Directive also sets forth certain limitations and restrictions on the Bank and its business. The Directive restricts the interest rates that the Bank may pay on deposits to prevailing rates paid on deposits of comparable amounts and maturities paid by other FDIC insured depository institutions in the State of California. In addition, the Bank is not permitted to make any capital distributions to the Company, FGCC or any affiliate of the Bank, or to pay bonuses or increase the compensation of any director or officer of the Bank. The Directive further restricts transactions between the Bank and its affiliates. This Directive provides that it will remain in effect until the Bank is "adequately" capitalized on average for four consecutive calendar quarters, unless the Directive is otherwise modified, terminated, suspended or set aside by the FDIC. The Bank is and continues to be subject to the requirements and obligations set forth in the FDIC Cease and Desist Order dated March 7, 2007 and the DFI Final Order dated April 13, 2007."

Fremont General is no mega-institution. But it did have $8.8 billion in total assets of September 2007. And it's not alone as a troubled institution, a fact the FDIC itself has discussed recently.

Second home buying, residential real estate investment purchases fall again

Not that it should come as any surprise, but the latest figures out of the National Association of Realtors show that the vacation home and investment share of home purchases continued to drop in 2007. Investment purchases accounted for just 21% of the market in 2007, down from 22% in 2006. Vacation home purchases were just 12% of the market, down from 14% a year earlier.

That means the total share for non-owner-occupied purchases dropped to 33% of market transactions from 36% in 2006. At the peak of the bubble in 2005, that share hit a record 39.9%. In terms of volume, vacation home sales plunged 30.6% to 740,000 in 2007 from 1.07 million in 2006, 1.02 million in 2005, 872,000 in 2004, and 849,000 in 2003. Investment home sales dropped 18.1% to 1.35 million from 1.65 million in 2006, 2.32 million in 2005, 2 million in 2004, and 1.57 million in 2003.

Thursday, March 27, 2008

TSLF results

The results of the first Term Securities Lending Facility auction are in. The Fed sold/swapped $75 billion in securities. $86.1 billion in bids were submitted, meaning the auction had a 1.15 bid-to-cover ratio.

As a refresher, the TSLF allows institutions to swap AAA private mortgage-backed securities, agency collateralized mortgage obligations, and other paper for U.S. Treasuries. The Fed also expanded the program to allow primary dealers to offer Commercial Mortgage Backed Securities at the auction.

What do CMBS have to do with the residential mortgage market, ostensibly the market at the heart of this crisis and the one that the Fed is trying to save? Anyone? Anyone? Bueller? Certainly a few lobbying organizations are happy. But I just don't get it. Heck, I'm wondering when the Fed will accept every security and loan in the entire universe, right down to those bonds that gave holders the rights to David Bowie's royalties.

Is the Fed finally going to shift its unwise approach to asset bubbles?

I can't believe my eyes. Look at these headlines from Bloomberg about a London speech by Minneapolis Fed President Gary Stern today:

* "Stern says not 'costless' to wait for aftermath of bubbles."
* "Stern says he's 'reviewing' stand against targeting bubbles."
* "Stern says asset-price policies may not pass cost-benefit test."

And here are Stern's comments in their entirety:

"There is one additional issue I would like to consider briefly, having to do with policy and asset prices, before concluding these remarks, because it follows directly from some of the issues we currently confront, especially those dealing with TBTF [My note: Too Big Too Fail] and systemic risk. Here is another example of how history, however recent, can inform our understanding of current events. While I have not yet changed my opinion that asset-price levels should not be an objective of monetary policy, I am reviewing this conclusion in the wake of the fallout from the decline in house prices and from the earlier collapse of prices of technology stocks. To be sure, it is challenging at best to identify when asset prices have reached excessive levels, to build support for action once identification has occurred, and to implement corrective policy successfully. These are all significant obstacles, and thus it may well be that containing damage as and after prices correct is, in the end, the preferable alternative.

"However, I think it is important to consider these conclusions in light of recent events, where it has proven to be neither easy nor costless to deal with the aftermath of unsustainably high asset prices. I won’t try your patience this afternoon by going into this topic in depth; let me just say at this point that I suspect that there may be practical, albeit far from infallible, ways to identify excesses in asset prices. Moreover, it is well within the realm of possibility for policymakers to build support for, and at least obtain tolerance of, policies designed to address excesses. It is not clear, however, that such policies would necessarily pass a cost-benefit test, for actions to limit or reduce asset prices quite likely would have implications for economywide growth and employment. But then, so, of course, do asset-price collapses, and thus this is a juncture, likely one among several, where careful thought and rigorous analysis have to be brought to bear. This is a task for another day, however."

Hallelujah! Someone at the Fed gets it. For more background on this pet argument of mine, see this post.

Wednesday, March 26, 2008

New home sales slip in February

We got a glimmer of hope in the February existing home sales report -- namely, that buyers actually responded to price cuts by dipping a toe back in the water. Did the new home market show something similar? Not really. Here's the recap ...

* Sales fell 1.8% to a seasonally adjusted annual rate of 590,000 in February from a revised 601,000 in January (previously reported as 588,000). That was a bit better than the forecast of 578,000 home sales. From a year earlier, sales were down 29.8%. That leaves them at the lowest since February 1995.

* The supply of homes for sale dipped again to 471,000 in February from 481,000 in January and 544,000 a year earlier. On a months supply at current sales pace basis, inventory was unchanged from January at 9.8 months, but up from 8.1 months in February 2007. That's the highest since October 1981 (10.3 months).

* Median home prices jumped 8.2% to $244,100 last month from $225,600 in January (previously reported as $216,000). However, they fell 2.7% from $250,800 a year earlier.

The new home market continued to struggle last month, with sales volume slumping again and inventory remaining elevated, especially when measured on a "months supply" basis. The raw number of homes for sale is falling, however, as builders cut back aggressively on new construction. And the latest upswing in mortgage application activity is exactly what the industry wants to see.

The key question going forward: Will this short-term sales momentum hold through the heart of the spring selling season? On the one hand, tighter mortgage lending standards, slumping consumer confidence, and the worsening job market argue for weaker sales. On the other hand, the recent moves to raise jumbo loan limits in certain high-cost areas and to expand the FHA loan program should help some potential buyers. The other steps aimed at restoring liquidity in the secondary mortgage market have also temporarily calmed twitchy bond investors. We'll have to see if it sticks.

If there's one thing that is clear to me, it's this: Sellers will have to continue lowering prices to attract buyers. That is what is driving demand in this glutted housing market.

Mortgage applications surge

Check out the activity in the home loan market in the week ended March 21: Purchases up 10.6% and Refinances up 82.2%. That's the biggest surge in refis in any weak going back seven years, and a decent pop in purchases. It appears many borrowers saw the Fed cutting rates and jumped at the opportunity to refi into fixed-rate loans -- fixed rate apps jumped 54.7% while ARM apps fell 28.9%. As a matter of fact, ARMs captured a paltry 3.8% of total loan app share -- the lowest going all the way back to March 22, 1990.

The key questions: Can this momentum be sustained? And are many of these loan applications converting into approvals, or are tighter standards resulting in a higher fallout rate? Regardless, the figures show the Fed was able to impact mortgage demand for the first time in a while.

Tuesday, March 25, 2008

Consumer confidence collapses

Now THAT was ugly -- the Conference Board's consumer confidence index plunged to 64.5 in March from 76.4 in February. That's the lowest reading in five years and far worse than the 73.5 number that economists were looking for. The outlook index, which measures what consumers think about the future of the U.S. economy, fell to 47.9 -- the lowest level since 1973.

I think a lot of this stems from the ongoing housing slump, and the recent stock market turmoil. Speaking of which, the latest figures on the housing front were released just this morning. The S&P/Case-Shiller index (PDF link) of home prices in 20 top metropolitan areas fell 10.7% year-over-year in January. That was worse than the 9% drop in December and the 13th straight fall. The declines were widespread, with 19 of 20 cities reporting a YOY fall (led by Las Vegas and Miami at -19.3%, with Phoenix (-18.2%) and San Diego (-16.7%) not far behind).

Got junk? If so, you're hurting

Everyone's focus over the past several months has been the meltdown in the mortgage debt market. But this credit crisis is much broader. I've talked about how everything from commercial mortgage bonds to municipals have gotten hammered amid a broad flight from risk. And this morning, Bloomberg shines the spotlight on the dismal performance of junk bonds. Have a look ...

"High-yield, high-risk bonds are off to their worst start ever, and the biggest investors say there's no recovery in sight.

"Junk bonds have fallen an average 3.9 percent this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes. Some funds managed by John Hancock Advisers LLC, Oppenheimer Funds Inc. and Fidelity Investments are down more than 7 percent, showing that even the largest investors were caught off guard by the collapse.

"While the Federal Reserve has slashed benchmark interest rates by 3 percentage points since September, it has been unable to get investors to increase their purchases of the riskiest assets. The declines are choking off financing for speculative- grade companies, boosting defaults. The debt is likely to "struggle'' for months as the economy enters a recession, according to JPMorgan Securities Inc., the top high-yield research firm in Institutional Investor magazine's annual poll.

"The moves have been absolutely vicious,'' said Arthur Calavritinos, whose $1.2 billion John Hancock High Yield Fund has lost about 9.8 percent since December. The Boston-based manager said it's the worst market since he started in finance in 1985.

"Just 11 companies have issued $9 billion of junk bonds in the U.S. in 2008, according to data compiled by Bloomberg. This time last year, 83 had sold $39.5 billion. Junk bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's."

Monday, March 24, 2008

February existing home sales rise

The National Association of Realtors just released its report on February existing home sales. It showed:

* Sales rose 2.9% to a seasonally adjusted annual rate of 5.03 million from 4.89 million in January. That was better than economists' forecasts for a drop of 0.8% to 4.85 million. Regionally, sales rose 11.3% in the Northeast, 2.1% in the South, and 2.5% in the Midwest, while falling 1.1% in the West. The February sales rate was down 23.8% from 6.6 million in February 2007.

* For sale inventory came in at 4.034 million single-family homes, condos, and co-ops. That was down 3% from 4.16 million in January (previously reported as 4.191 million), but up 6% from 3.805 million in February 2007. On a "months supply at current sales pace" basis, inventory was 9.6 months. That was down from 10.2 months in January (previously reported as 10.3), but up from 6.9 months in February 2007.

However, there was a bit of bifurcation by property type. The condo/co-op months supply indicator rose to a cycle high of 13 from 11.8 -- indicating that growth in condo supply outpaced growth in sales. By contrast, the single-family-only inventory indicator dipped to 9.2 from 10.

* Median home prices fell 1.9% to $195,900 in February from $199,700 in January (previously reported as $201,100). On a year-over-year basis, prices were down 8.2% from $213,500 in February 2007, the sharpest drop recorded yet in this cycle.

Are lower prices finally drawing buyers out of the woodwork? Maybe. Existing home sales topped expectations last month, while the absolute level of inventory for sale declined. The likely contributing factor: Median home prices fell at the sharpest year-over-year rate in this cycle. At $195,900, "used" U.S. homes haven't been this cheap since May 2004.

It will be interesting to see if the housing market can maintain this momentum heading into the heart of the spring selling season. On the one hand, credit markets remain tight and the economy is still struggling. On the other hand, both the Federal Reserve and federal government are throwing everything at the mortgage market to re-liquefy it. Fasten your seat belts.

Quick Monday morning musings

So here we are, strapped in for another week of market fun. What's catching my eye this weekend?

* A story from the Washington Post about the psychology of excessive leverage, borrowing and spending. I like this quote from Jason Zweig, author of "Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich" ...

"If I borrow a million dollars to buy a house, the fact that I can't afford to borrow it is dwarfed by the fact that I'm getting a million dollars," Zweig said. "That's just really exciting. And the entire subprime industry acted as the credit card industry has acted: focusing people's attention on what money can do for you right now and taking your mind off having to pay a lot of money down the road."

* News that CIT Group -- mentioned here before the long weekend -- is looking for cheap funding from overseas banks.

* Selling in the bonds, buying in stocks on more "The worst is over" market action. Next up: Data on February existing home sales (followed by new home sales on Wednesday)

Thursday, March 20, 2008

How 'bout them T-bills

The stock market might not be reflecting a state of panic out there. But Treasury bills sure are. Three-month T-bills are now yielding roughly 52 basis points. Yes, I mean roughly one-half of one percent ... against a federal funds rate of 2.25%. Bloomberg calls today's low yield (0.387%) the lowest going all the way back to at least 1954. That means we have undercut the "deflation scare lows" from 2003.

Now, if you want to see a REALLY scary chart, check out this one juxtaposing 3-month T-bill yields against S&P futures. Bill yields are the white line ... S&Ps the red. If bill yields are a leading indicator of stock prices on the way down, like they were on the way up (notice how bill yields topped out before stocks did in the recent rally off the 2002-2003 bear market low), we're in BIG trouble. Oh, and enjoy your weekend. LOL.

Tighter credit markets squeezing CIT

CIT Group is having a rough day, with the stock down roughly 39% at last check. What's going on? CIT is a company that does a lot of corporate finance -- big-ticket equipment leasing to aerospace and rail customers, trade finance, student lending, and vendor finance. It also has a book of home loans that it is in the process of running off (It hasn't originated any new mortgage loans since the second half of 2007).

CIT relies on a number of market-based funding programs to raise money for its loan and lease programs. They include (per its last 10-K): "commercial paper, unsecured debt, and both on-balance sheet and off-balance sheet securitizations" plus "conduit facilities and committed bank lines of credit."

The trouble is that CIT's ratings have recently been cut by Moody's and S&P. That has market players worried the company could lose access to short-term funding. The result: CIT is drawing on its $7.3 billion in backup, unsecured bank credit lines. If you recall, we saw Countrywide Financial do something similar last August when it experienced funding pressures in the market.
The moral of the story? Every time you think you have the credit market turmoil and problems licked, another "mole" pops up.

More economic red flags popping up

We got some timely data on the economy today ... data that suggest the economy is struggling. A few details:

* Initial jobless claims filings jumped to 378,000 in the most recent week from 356,000 a week earlier. That's the highest reading yet for this cycle. If you exclude the weeks that followed Hurricane Katrina in 2005, this is also the highest reading since February 2004 (shown in the chart above).

* The Philly Fed index came in at -17.4 in March. True, that's up from -24 in February, but it's well off year ago levels of 0.20. Moreover, the internals of the report were weak. The new orders sub-index came in at -9.3 (the third month in a row of negative readings), while the employment sub-index registered -4.7. That's the worst reading since June 2003.

Wednesday, March 19, 2008

Fannie/Freddie capital requirements eased

The rumored changes to the capital requirements and Fannie Mae and Freddie Mac are official. Here's the word from the Office of Federal Housing Enterprise Oversight:

"OFHEO, Fannie Mae and Freddie Mac today announced a major initiative to increase liquidity in support of the U.S. mortgage market. The initiative is expected to provide up to $200 billion of immediate liquidity to the mortgage-backed securities market. OFHEO estimates that Fannie Mae’s and Freddie Mac’s existing capabilities, combined with this new initiative and the release of the portfolio caps announced in February, should allow the GSEs to purchase or guarantee about $2 trillion in mortgages this year. This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas.

To support growth and further restore market liquidity, OFHEO announced that it would begin to permit a significant portion of the GSEs’ 30 percent OFHEO-directed capital surplus to be invested in mortgages and MBS. As a key part of this initiative, both companies announced that they will begin the process to raise significant capital. Both companies also said they would maintain overall capital levels well in excess of requirements while the mortgage market recovers in order to ensure market confidence and fulfill their public mission.

OFHEO announced that Fannie Mae is in full compliance with its Consent Order and that Freddie Mac has one remaining requirement relating to the separation of the Chairman and CEO positions. OFHEO expects to lift these Consent Orders in the near term. In view of this progress, the public purpose of the two companies, and ongoing market conditions, OFHEO concludes that it is appropriate to reduce immediately the existing 30 percent OFHEO-directed capital requirement to a 20 percent level, and will consider further reductions in the future.

Additionally, all parties recognize the need for a world-class regulatory structure and have renewed a shared commitment to work for comprehensive GSE reform legislation.

“Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year,” said OFHEO Director James Lockhart. “Let me be clear – both companies have prudent cushions above the OFHEO-directed capital requirements and have increased their reserves. We believe they can play an even more positive role in providing the stability and liquidity the markets need right now. OFHEO will remain vigilant in supervising the safe and sound operations of these companies, and will act quickly to address any deficiencies that may arise. Furthermore, we recognize the need to ensure that their capital levels are strong, protecting them from unforeseen risks as the market recovers.”

Fannie Mae President and Chief Executive Officer Dan Mudd said, “We are working with our customers, regulators and policy makers to minimize foreclosures, increase affordability – and as of today – to restore liquidity in the market. This progressive, sustainable plan will help bring the stability the market needs.”

Freddie Mac Chairman and Chief Executive Officer Dick Syron said, “The recent environment demonstrates the benefits of the GSEs to the U.S. economy. This approach allows us to continue to create these benefits in a way that balances our mission to provide stability, liquidity, and affordability consistent with safety and soundness while enhancing the interests of shareholders.”

This is just the latest move by both the Fed and the federal government to ease the mortgage crisis. Fannie Mae, Freddie Mac, and the FHA are all being forced to step in and fill the gap left by the exodus of private lenders and mortgage investors. As the AP notes:

"The $168 billion economic stimulus package enacted last month included a temporary increase in the cap on mortgages that the companies can purchase or guarantee, from $417,000 to $729,750 in high-cost markets. And, as a reward for filing timely financial statements following multibillion-dollar accounting scandals, Fannie and Freddie were freed on March 1 of a combined $1.5 trillion cap on their mortgage-investment holdings."

Now, we watch and wait to see whether this leads to a LASTING improvement in mortgage market liquidity. Many of the previously announced plans and steps (FHASecure, Paulson's subprime ARM freeze, the Fed's unveiling of the TAF auctions, and so on) have helped calm the markets down temporarily. But the improvements have been short-lived because new confidence-shaking crises have kept popping up and home prices have continued to decline. Even former Fed Vice Chairman Alan Blinder used the "Whac-A-Mole" analogy in a recent Bloomberg story.

Tuesday, March 18, 2008

Fed cuts 75 points, ratchets up inflation rhetoric

Interesting move by the Federal Open Market Committee today. They cut rates by only 75 basis points, versus market expectations that were generally leaning toward a 100-point cut. The Fed also ratcheted up its inflation fighting lingo a bit. Here is the text of the statement:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

"Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

"Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

"Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

"In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco."

Incidentally, I'm scheduled to go on CNBC at 3:45 p.m. Eastern today to talk about the latest housing figures and the potential impact of the Fed's move on the mortgage market. Feel free to check it out if you're interested.

Devil in the details of the February starts and permits figures

We just got a look at home construction activity in February. The devil is really in the details here, so allow me to explain:

* Overall housing starts came in hotter than expected -- 1.065 million units at a seasonally adjusted annual rate. That was above the 995,000 units that the markets were looking for. Moreover, January's number was upwardly revised to 1.071 million. But starts are still down 28.4% from a year ago (and 53.5% from their January 2006 peak of 2.292 million). Also ...

* Building permit issuance dropped sharply -- from 1.061 million units in January to just 978,000 last month. That's the lowest level since September 1991 (974,000), down 36.5% from the year-earlier level, and off 56.8% from the peak (2.263 million units in September 2005). Since permit issuance is an indicator of future construction, we will likely see starts fall further.

* Now, let's dig even deeper into the starts figure. When we do, we see that the strength was in the more volatile multi-family market. Specifically, multiple-unit starts were up 14.4%. Single-family home starts, on the other hand, dropped sharply again -- 6.7% on the month to 707,000 from 758,000 a month earlier. That leaves SF starts at the lowest level since January 1991 (604,000).

* And what about permitting? There, the news was bad for both MF and SF -- down 10.8% on multi-family permits and 6.2% on single-family.

Bottom line: Yes, the report was "better than expected." But no, it doesn't show an end to the slump in the single-family home market.

Monday, March 17, 2008

NAHB Index stagnates in March

The latest National Association of Home Builders index was just released. Here's the skinny on the numbers:

* The overall index remained unchanged at 20 in March, in line with economists' forecasts. That's up from the record low of 18, set in December, but far below the March 2007 level of 36.

* Among the sub-indices, the one measuring present sales was unchanged at 20. So was the subindex measuring prospective buyer traffic. The index measuring expectations about future home sales fell 1 point to 26 from 27.

* Regionally, the index fell in the Northeast (to 21 from 23) and the West (to 15 from 16). It was unchanged in the Midwest (at 16) and up in the South (to 26 from 24).

It continues to be a tough market for the nation's home builders. We have a glut of inventory for sale, and buyer confidence is in the dumps. Moreover, the latest credit market turmoil only raises the stakes for the housing market. If lenders continue to tighten up on credit, more prospective buyers will find it tougher to qualify for home loans. That will crimp demand, and force sellers to cut home prices further in response. So builders and lenders are clearly hoping the Federal Reserve's extraordinary steps to ease the credit crunch will prove successful.

Armageddon it ...

Is this "it?" Is this the equivalent of financial Armageddon? I mean, look at what has occurred in the past 72 hours or so ...

* A top Wall Street firm, Bear Stearns, has announced it will sell itself for a few wooden nickels and a cup of coffee. (Technically the price is $2 a share, or about $240 million, but you get the drift). The deal is being facilitated by the most aggressive market intervention on the part of the Federal Reserve in decades.

* Speaking of the Fed, it just cut the discount rate by another 25 basis points to 3.25% -- on a Sunday night, no less.

* Moreover, the Fed said it would borrowing privileges to all the primary dealers (including investment banks) that it deals with.

* The dollar is falling out of bed virtually every day, with the Japanese yen (a key barometer of risk appetite) up another 250 basis points or so this morning. Stocks have been falling sharply. Treasury bonds have been soaring. And the price of gold has vaulted solidly through $1,000 an ounce.

You could argue that when things finally hit the widespread panic stage, you're closer to the end of a financial crisis than the beginning. Historically, that has been the case. But these are truly troubling and trying times, and this crisis appears to be both more widespread and deeper than others we have faced in recent years (think Long Term Capital Management in 1998). Regardless, it's time to fasten your seatbelts and get ready for a wild market ride.

Friday, March 14, 2008

The sad reality we face today -- and what it should teach us about the danger of asset bubbles

As I sit here and contemplate the truly astounding headlines crossing the tape lately, I want to go back to something I've been saying for a long, long time ...

The only way to prevent the pain of popping bubbles is to prevent bubbles from inflating in the first place!

I have expressed my displeasure several times over the Federal Reserve's stated policy of ignoring asset bubbles as they inflate, most notably last May before this meltdown really got underway. Policymakers claim they don't target asset bubbles because:

A) They shouldn't substitute their judgment for the market's


B) It's impossible to identify bubbles except in hindsight anyway.

The better solution — in their view — is to come in and try to mop up the aftermath by slashing rates and taking other steps.

The polite way of describing that policy? Nuts. Just plain nuts.

I mean, if you asked 100 people on the street whether dot-com stocks and the Nasdaq overall were caught up in a large bubble in 1998-99, you'd have heard 99 answer yes. And if you asked another 100 people whether the housing market was in bubble-land in 2004 and 2005, you'd get the same thing: A resounding yes from just about everyone.

You could see it in the statistics. You could see it all around you in everyday life — the Miami condo parties, the buyers camping out to snap up three, four, or five homes at a time, the 5%-per-quarter increases in home prices. Respectable economists and analysts everywhere were warning that we were courting disaster.

The idea that the Fed couldn't identify that we were in a bubble — one that called for aggressive regulatory and monetary policy action to counter it — is simply not credible. Because nothing was done back then, the bubble wasn't nipped in the bud, and a future "pop" was all but guaranteed. As a result, we are now left to cope with waves of foreclosures, hundreds of billions of dollars in writedowns and losses, and potential bank and broker failures/bailouts. Policymakers are also being forced to throw everything but the kitchen sink at the problem.

So where do we go from here? I want to believe we can turn things around. I want to believe that all these policy actions ... the aggressive construction cutbacks we're seeing from the major home builders ... lower home prices ... lower interest rates ... and everything else will help turn the tide eventually. I still think that can happen as we head into 2009 and beyond (I'm writing off 2008).

But I have to tell you, it's hard to eliminate that nagging voice in the back of my mind — the one that says there's an outside chance of a long economic slog ... something akin to what Japan faced in the 1990s after that country's twin stock and real estate bubbles popped. Let's hope not.

Bear Stearns getting a JPMorgan/NY Fed rescue/bailout

I can't believe these headlines: JPMorgan and the Federal Reserve Bank of New York are apparently arranging a rescue/bailout for Bear Stearns. The details from dueling press releases:

FROM JPMorgan:

"Today, JPMorgan Chase & Co. announced that, in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. Through its Discount Window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase.

"Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company."

FROM Bear Stearns:

"The Bear Stearns Companies Inc. announced today it reached an agreement with JPMorgan Chase & Co. (JPMC) to provide a secured loan facility for an initial period of up to 28 days allowing Bear Stearns to access liquidity as needed. Bear Stearns also announced that it is talking with JPMorgan Chase & Co. regarding permanent financing or other alternatives.

"Alan Schwartz, president and chief executive officer of The Bear Stearns Companies Inc., said, "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.

"The company can make no assurance that any strategic alternatives will be successfully completed."

UPDATE: The Federal Reserve just released its own statement. Here is the text:

"The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system. The Board voted unanimously to approve the arrangement announced by JPMorgan Chase and Bear Stearns this morning."

No inflation in February?

The Consumer Price Index for February was a surprise, to say the least. According to the gubmint trackers ...

* The overall CPI was unchanged in February, vs. a gain of 0.4% in the prior month and expectations for a rise of 0.3%. CPI is still up 4% from a year ago, though that's down from 4.3% in January.

* The core CPI (which strips out food and energy) was also unchanged, vs. +0.3% in January and expectations for a gain of 0.2%. Core CPI is up 2.3% from a year ago, down from January's 2.5% rise.

* Now here's where it gets interesting: Apparel prices fell 0.3%, transportation prices fell 0.7%, commodities prices fell 0.2%, and personal computer prices dropped 0.5%. Oh and in case you were wondering, gasoline prices fell 2%.

I don't know about you, but I think this looks more like a timing issue than anything. In other words, the data collectors weren't in the field at the right time to capture the big run-ups we have seen since in gas, oil, and other commodities. On the other hand, the declines in the prices of consumer goods (apparel, computers, and so on) are probably a side effect of reduced demand stemming from the economic slump.

Thursday, March 13, 2008

Feds weigh in on causes of the current crisis -- and how to prevent future meltdowns

If you haven't already seen the news, the President's Working Group on Financial Markets has weighed in on the financial crisis -- what helped cause it and what can be done to prevent similar crises in the future. The PWG had the following to say about the nature of its recommendations:

"The recommendations offer steps to improve market transparency and disclosure, risk awareness and risk management, capital management and regulatory policies and market infrastructure for products such as over-the-counter derivatives. The statement focuses on changes needed from financial regulators and all market participants, including mortgage originators and brokers, financial institutions, issuers of securitized products, credit rating agencies and investors. The statement also discusses the challenges presented by securitization and over-the-counter derivatives."

Treasury Secretary Paulson goes into more detail here about the recommendations, if you're interested. Or if you're a real policy wonk, you can read the complete 21-page document at this PDF link.

Meanwhile, there's a new plan in Congress to help ease the foreclosure crisis. In a nutshell, the proposed legislation from House Financial Services Committee Chairman Barney Frank encourages lenders to write down mortgage principal balances. Then the affected borrowers would be refinanced into FHA-insured mortgages. There's a lot of nitty gritty involved, which you can read about here.

February foreclosures up 60% YOY

RealtyTrac released its latest report on nationwide foreclosure activity today. According to the firm, total filings came in at 223,651 last month. That was down 4% from January, but up 59.8% from February 2007. The record to date was 239,851 in August 2007. The chart above shows the progression of foreclosures since RealtyTrac began releasing its figures at the beginning of 2005.

A bold call from S&P? Or a premature one?

Here's an interesting call out of S&P this morning -- one that has given the market a boost since it's so out of left field. The only problem is that EVEN if S&P is right and the subprime-related writedowns are behind us, we've moved far beyond the time when this was just a subprime mortgage crisis. Financial firms are experiencing big problems with Alt-A loans ... commercial MBS ... hung LBO loans ... auto and credit card losses ... and so on. Anyway, here's the meat of S&P's call:

"Standard & Poor's Ratings Services believes that the bulk of the write-downs of subprime securities may be behind the banks and brokers that have already announced their results for full-year 2007. There may be some additional marks to market as market indicators have shown deterioration in the first quarter. However, when we dissect the percentage of write-downs taken against various types of exposures, in our opinion the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses.

"The write-downs of collateralized debt obligations (CDOs) of subprime asset-backed securities (ABS) by large banks and investment banks (referred to as banks) in North America and Europe to-date total approximately $110 billion. To this amount we add approximately $40 billion in write-downs of insurers (financial guarantors and other insurers) and banks in the Gulf States and Asia to arrive at a rough estimate of $150 billion in global disclosed write-downs to-date.

"Most of the write-downs have been on the so-called supersenior tranches of CDOs of subprime ABS. To date, banks have written down their unhedged supersenior CDOs of ABS by more than $65 billion. On an original exposure of about $160 billion, this represents about a 40% discount. However, that discount percentage varies tremendously from institution to institution."

Wednesday, March 12, 2008

Dollar rumblings in the Middle East

Most of the post-Fed moves (big rally in stocks, big surge in 2-year yields, etc.) have largely stuck, with a little bit of giveback. But the one glaring exception is the U.S. dollar. The Dollar Index (DXY) staged a rally after the Fed plan was announced ... but it has largely given up those gains today. In fact, the Dollar Index touched 72.47 today, its pre-Fed low yesterday. The euro currency also set a marginal new high.

What gives? Several forces, but a key source of weakness appears to be rumblings in the Middle East about dollar pegs. Many regional currencies, including the UAE dirham and the Qatari riyal, are pegged to the U.S. dollar at fixed exchange rates. The problem is, having a dollar peg in your country essentially links your monetary policy to the U.S.'s monetary policy. If the U.S. Fed cuts rates to stimulate the U.S. economy, your economy will be stimulated as well -- even if the LAST thing you need is an extra boost. And believe me, most economies in the Middle East don't need it -- after all, they're raking in billions and billions of dollars from oil sales.

The result of the Fed-provided stimulation ... on top of strong regional economic growth ... is a gigantic inflation problem in many Gulf countries. UAE inflation surged to a record high 9.8% last year, according to estimates, up from 9.3% a year earlier. The government is planning to cap certain food prices and considering building up a "strategic food reserve" in response. In Qatar, inflation is exploding higher at a 13.7% rate, prompting countermeasures such as rent caps.

A publication called Emirates Business 24/7 reported that six Gulf nations are going to meet in a few days to discuss regional dollar pegs. Qatar came out today to deny that it was a currency revaluation-focused meeting. But based on trading in the dollar today, the market looks a bit skeptical.

UPDATE: The DXY was recently off 1.19%, its biggest single-day loss since January 3, 2006. Long bond futures were recently up two points in price. That's a 1.69% upside move, the biggest rally going all way back to August 6, 2004 (also +1.69%). Wow.

WSJ takes on the home equity loan headache

From the Wall Street Journal this morning:

"Here comes another headache for banks suffering from the mortgage downturn: Losses on home-equity loans are soaring, even at some lenders that avoided big blunders on subprime loans.

"When times were good, banks raked in billions of dollars in profit from home-equity loans, which allow borrowers to tap the accumulated value in their property with either a loan for a specific amount or a line of credit. As long as home prices were rising, lenders had little to worry about.

"But falling home values are leaving banks with little or nothing to collect on many home-equity loans in case of default. Some stretched borrowers are keeping up with their mortgage and credit cards -- but not their home-equity loan.

"The problems are already causing trouble for J.P. Morgan Chase & Co. and Wells Fargo & Co., and are expected to hit other large banks when first-quarter earnings results are released next month. The pain is likely to deepen through the rest of 2008, sapping capital levels and resulting in tighter lending standards as banks try to reduce their risk.

"These losses are well beyond what we would have modeled ... and continue to get worse," said Charles Scharf, head of J.P. Morgan's retail business."

The bottom line is this: Having borrowers with high CLTV ratios -- whether it's because they took out a 100% first, an 80% first/20% second split, or any other combination of loans -- is a recipe for big losses when home prices fall. It's also worth pointing out that second-lien lenders aren't exactly operating from a position of strength. As the WSJ notes:

"While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral -- a house -- after the mortgage is paid off.

"When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt."

Meanwhile, even finance industry executives can't seem to find much good to say about the housing market. Richard Syron, the CEO of Freddie Mac, said today that this is "the worst housing market in a century," and added that we are only about 1/3 of the way through the home price decline. The chief risk officer at Wachovia, for his part, said the housing outlook "appears to be worsening," per Bloomberg, and has a "ways to go."

Tuesday, March 11, 2008

Now that's a rally

Up 417 points up on the Dow (+3.6%, the biggest percentage gain since 2003). Up 47 points on the S&P. Up 29 bps for the 2-year note yield. I guess that's what happens when the Fed says to the commercial and investment banks (with my apologies to Emma Lazarus): "Give me your tired, your poor, your huddled masses of illiquid paper yearning to breathe free! The wretched refuse stinking up your balance sheets and preventing you from making new loans."

Now we see if it gains traction and/or has staying power. Interesting times indeed.

More Fed intervention in the markets just announced

Here's the news out of the Federal Reserve:

"Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures.

"To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures.

"The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

"In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.

"The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion."

Here is some more coverage on the Fed's move from the AP and Bloomberg.

UPDATE: If all this stuff confuses the heck out of you and you're looking for a clearer explanation of the meaning of this program, here's a good summary paragraph from the Wall Street Journal:

"As with related steps announced last Friday, the latest Fed moves won't result in a net increase in reserves or cash to the banking system, which would put downward pressure on the federal funds rate, which the Fed now targets at 3%. That rate is charged on overnight loans between banks. Rather, the steps simply swap one type of asset on the Fed's balance sheet -- Treasurys -- for another -- loans to banks and securities dealers, backed by a wide variety of collateral. In that way the Fed hopes it can surgically direct relief to the pockets of the financial market that need it most. That would lessen the pressure for more aggressive use of the blunter instrument of interest rate cuts, which carries with it the risk of inflaming inflationary psychology such as through a weaker dollar or higher commodity prices."

Monday, March 10, 2008

Same as it ever was in the markets

Guess Friday's rally was just short-covering after all. Today, we're back to more of the same, with oil prices flying, stocks trading lower, the dollar weak against the Japanese yen (a key "anti-risk" currency, and Treasuries flying (long bond futures up a point and a half recently).

What gives? How about news of large losses at private equity firms like Blackstone Group, covered by AP below?

"Private equity firm Blackstone Group LP said Monday it swung to a loss during the fourth quarter due to a write-down on its investment in bond insurer Financial Guaranty Insurance Co. and deterioration in the credit markets.

"Shares in Blackstone, which went public last June, hit an all-time low on the news. Blackstone lost $170 million during the fourth quarter, compared with earnings of $1.18 billion during the final quarter in 2006.

"Adjusted net income, which was adjusted for special revenues and expenses tied to the company's public offering, fell to $88 million, or 8 cents per share, from $808.1 million, or 72 cents per share, during the year-ago period.

"Analysts polled by Thomson Financial, on average, expected Blackstone to turn a profit of 19 cents per unit for the quarter. Analysts do not always include special charges in their estimates."
Or maybe it's ongoing, forced selling from hedge funds on margin, as chronicled in this Bloomberg story?

"The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States.

"Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.

"While lenders are most unsettled by credit consisting of real estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasuries, considered the world's safest securities, because of the price fluctuations in the bond market.

"If you have leverage, you're stuffed,'' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back."

Or maybe it's rumors of more funding/liquidity problems in the financial sector -- rumors which are impossible to prove or disprove, I should add.

UPDATE: This evening, Bear Stearns released the following statement;

"The Bear Stearns Companies Inc. today denied market rumors regarding the firm’s liquidity. The company stated that there is absolutely no truth to the rumors of liquidity problems that circulated today in the market.

Alan Schwartz, President and CEO of The Bear Stearns Companies Inc., said, “Bear Stearns’ balance sheet, liquidity and capital remain strong.”


Or maybe ... just maybe ... we're getting what we deserve? Maybe we're just getting back to a more normal environment after a multi-year binge on stupid LBO loans, stupid mortgage loans, stupid commercial real estate loans, and just all around stupid behavior? Painful? Yes. Necessary? Probably. There were some solid thoughts on this issue posted by Bennet Sedacca over at -- check out his piece here if you're interested.

Friday, March 07, 2008

Interesting market action today

I don't know how many readers here follow the markets day-to-day (or intraday, for that matter). But today has really been fascinating. Nasty stock market open, followed by a big rally. Long bond futures prices surge, but then reverse all the way into the red (down about 10/32 at the low). Dollar Index tanks right after the bad jobs news comes out, then reverses sharply and actually goes positive (meaning, the dollar rallied vs. other currencies). Is this a real reversal? Or just the mother of all short covering rallies across the board? Enquiring minds want to know.

WSJ: Regulators pushing banks to raise capital

The Wall Street Journal tackles the issues of bank capital, large loan losses, and potential failures. Here is an excerpt from today's story (I shared some thoughts a few days ago, if you're interested):

"With federal regulators prodding banks to raise more capital, Washington Mutual Inc. and other battered lenders have approached private-equity firms and sovereign-wealth funds about possible cash infusions, according to people familiar with the situation.

"It isn't clear if the discussions will result in a new round of infusions beyond those already made at the likes of Citigroup Inc. and Merill Lynch & Co., each of which has raised billions of dollars to stabilize their balance sheets. Much of that money came from government investment funds in the Middle East and Asia.

"But concern that mounting losses on loans and mortgage-related investments could threaten the health of the U.S. banking system is spurring regulatory action. In recent weeks, the Federal Reserve and Office of the Comptroller of the Currency have quietly reached out to a handful of banks with informal instructions: Seek outside capital.

"Seattle-based WaMu, the nation's largest savings-and-loan institution, is one of the biggest lenders looking to line up additional capital, say people familiar with the matter. In the fourth quarter, the thrift, as S&Ls are known, reported a $1.87 billion loss fueled by a sharp increase in its reserve for loan-related losses. A WaMu spokesman declined to comment.

"Regulators are publicly urging even healthy banks to replenish their coffers so that they can keep lending and expanding their businesses if the U.S. economy continues to weaken.

"Those institutions that move more quickly [to raise capital] will obviously be in a stronger position to deal with the challenges, and take advantage of the opportunities, ahead," said Timothy Geithner, president of the Federal Reserve Bank of New York, in a speech yesterday."

February jobs data looks grim

Here are the key numbers:

* Nonfarm payrolls dropped by 63,000 in February, versus expectations for a gain of 23,000. January's number was revised down to -22,000 from -17,000, while December's gain was cut to +41,000 from +82,000. The chart above shows the net number of jobs lost or gained each month, going back to early 2000.

* The unemployment rate dipped to 4.8%% from 4.9% in January. That was "better" than the expected 5%. But that's only because the labor force shrunk due to people giving up the hunt for work.

* Average hourly earnings rose 0.3%, in line with estimates and the previous month's rise.

* By industry, construction jobs fell by 39,000 ... manufacturing jobs dropped by 52,000 ... business services employment dipped 20,000 ... and retail trade employment fell by 34,000. The strongest gains were in non-cyclical categories -- government (+38,000) and education and health (+30,000). The private nonfarm diffusion index (which measures how many industries are adding workers vs. cutting them) sank to 45.6 from 46.2 in January.

These numbers are just plain weak, no two ways about it. The net loss of U.S. jobs was the worst for any month since March 2003 (-212,000). The declining diffusion index suggests job losses are being seen in a wider variety of industries. And the growth we are seeing is largely being driven by non-cyclical industries. Is there really any question whether we're in recession anymore? I don't think so.

Early market reaction: The long bond futures are flying, up 1 19/32 at last count. The dollar index is off another 30 ticks (though up slightly from its post-number lows). And stock futures have weakened significantly (down 14.50 on the S&Ps at last count).

Fed boosting TAF auction sizes, increasing repurchase activity

The Federal Reserve just announced that it will boost the size of the Term Auction Facility (TAF) auctions it has been running to $50 billion in March from $30 billion previously. It also said it will continue to run these auctions for at least six months. And it said it will be increasing activity in the repurchase market. Here's the full statement that was just released:

"The Federal Reserve on Friday announced two initiatives to address heightened liquidity pressures in term funding markets.

"First, the amounts outstanding in the Term Auction Facility (TAF) will be increased to $100 billion. The auctions on March 10 and March 24 each will be increased to $50 billion -- an increase of $20 billion from the amounts that were announced for these auctions on February 29. The Federal Reserve will increase these auction sizes further if conditions warrant. To provide increased certainty to market participants, the Federal Reserve will continue to conduct TAF auctions for at least the next six months unless evolving market conditions clearly indicate that such auctions are no longer necessary.

"Second, beginning today, the Federal Reserve will initiate a series of term repurchase transactions that are expected to cumulate to $100 billion. These transactions will be conducted as 28-day term repurchase (RP) agreements in which primary dealers may elect to deliver as collateral any of the types of securities -- Treasury, agency debt, or agency mortgage-backed securities -- that are eligible as collateral in conventional open market operations. As with the TAF auction sizes, the Federal Reserve will increase the sizes of these term repo operations if conditions warrant.

"The Federal Reserve is in close consultation with foreign central bank counterparts concerning liquidity conditions in markets."

Thursday, March 06, 2008

Citigroup slashing mortgage assets by $45 billion, tightening lending standards, taking other steps

From the just-released statement:

"Citi today announced it intends to reduce residential mortgage assets in its U.S. mortgage business by approximately $45 billion over the next 12 months, a 20 percent decrease from December 2007 levels, and will cut the amount of new loans to be held in portfolio by more than 50 percent in the next year. In addition, the company will integrate middle office and support areas to serve both first and second mortgage operations, organize sales channels around customer segments, and strengthen ties with Citi Markets & Banking, which will be the primary provider of capital markets services to its U.S. mortgage business going forward. Citi expects these changes to reduce expenses by approximately $200 million on a run rate basis within 12 months.

"In January, Citi announced the creation of an end-to-end U.S. residential mortgage business that includes origination, servicing and capital markets securitization execution headed by Bill Beckmann.

"As part of that change, Citi will consolidate operations, policies and procedures in its U.S. mortgage business to achieve greater operational efficiency, appropriate alignment of incentives and ensure in-depth, timely understanding of mortgage exposure. In addition, Citi will integrate all residential mortgage operations under the CitiMortgage name, including CitiMortgage, Citi Home Equity and Citi Residential Lending."

A few other key points:

* Citi will increase the level of loans sold to Fannie/Freddie or securitized to 90% of production by Q3 from 65% in 2007.

* Changes in business organization will result in "staffing levels that reflect market and economic realities"

As for lending standards, Citi had the following to say:

It will be "Improving the quality of origination, tightening underwriting criteria and making changes to policy and process to mitigate losses. CitiMortgage already has reduced the volume of second mortgage origination in general and reduced third party second lien loans by over 90% from a year ago, maintaining relationships with only those brokers who produce strong, high-quality and profitable volume. The company has tightened documentation and verification requirements across product mix and strengthened LTV (loan-to-value) requirements in declining markets. These shifts have resulted in higher FICO scores and lower LTVs for newer originations.

And it is "Eliminating a number of higher risk product offerings. CitiMortgage no longer offers mortgage loans for investment properties on three- and four-family homes and has curtailed bulk loan purchases. In addition, the company has eliminated 2/28 and 3/27 ARMS as well as home equity loans behind lower FICO score first mortgages."

Pending home sales flatline in January

We just got the latest pending home sales figures from the National Association of Realtors. The figures show that in January ...

* Pending home sales were unchanged from December, compared to expectations for a monthly decline of 1%.

* On a year-over-year basis, the seasonally adjusted sales index was down 20.8%. The index level -- 85.9 -- is just slightly above the 85.5 low to date, which was set in August.

* Pending sales fell in two regions and rose in the other two. They were down 4.1% in the Northeast, and down 6.1% in the South, but up 0.6% in the Midwest and up 13% in the West.

My take? The housing market remains stuck in the doldrums. Inventory levels are high, buyer confidence is down, and the economic outlook is uncertain. The Federal Reserve is trying to light a fire under housing demand by cutting short-term rates. But credit market turmoil and stingier lenders are thwarting its efforts so far. Bottom line: A lasting recovery isn't likely until 2009.

MBA: Delinquencies, foreclosures rise again in Q4 2007

The latest delinquency and foreclosure figures from the Mortgage Bankers Association were released this morning. Here's the story they told about mortgage performance in the fourth quarter of 2007:

* The overall mortgage delinquency rate jumped to 5.82% from 5.59% in Q3 2007 and 4.95% in Q4 2006. This is the worst late payment rate going all the way back to 1985.

* The subprime DQ rate jumped again -- to 17.31% from 16.31% in Q3 2007 and 13.33% in Q4 2006. But it's NOT just subprime loans that are souring. The prime delinquency rate rose to 3.24% from 3.12% in Q3 2007 and 2.57% in Q4 2006.

* The worst deterioration was evident in adjustable rate loans. Prime fixed-rate DQs rose to 2.56% from 2.54% quarter-over-quarter (and from 2.27% in the fourth quarter of 2006), while prime ARM DQs jumped to 5.51% from 5.14% quarter-over-quarter (and from 3.39% a year earlier).

* Meanwhile, the DQ rate on fixed-rate FHA loans actually dropped to 12.04% from 12.24% in Q3 2007 and 12.24 in Q4 2006. FHA ARM DQs climbed to 13.05% from 12.92% a quarter earlier, but dipped from 13.46% a year earlier.

* Mississippi had the worst loan delinquency rate at 11.07%, followed by Michigan (8.97%), Georgia (8.37%) and Indiana (8.35%). Several western states had the lowest DQ rates, including Oregon (2.98%), North Dakota (3.05%) and Wyoming (3.1%).

* What about foreclosures? Time to hold your nose. The percentage of mortgages entering the foreclosure process climbed to 0.83% in Q4 2007 from 0.78% in Q3 2007 and 0.54% a year earlier. The percentage of overall loans in any stage of foreclosure (shown in the chart above) climbed to 2.04% from 1.69% in Q3 2007 and 1.19% in Q4 2006.

These are the worst readings on record. As you might expect, subprime ARMs are showing the worst relative performance, with a foreclosure rate of a whopping 13.43%, up from 5.62% a year earlier.

* Foreclosure inventory was the highest in Ohio (3.88%), Indiana (3.53%), Michigan (3.38%), Florida (3.22%) and Nevada (3.02%).

Mortgage credit quality is deteriorating fast. The overall foreclosure rate has essentially doubled in the past year and a half to a record high, while the overall loan delinquency rate is at a level we haven't seen in 23 years. The reasons are clear: ARM resets are driving loan payments higher. Home prices are falling. And frankly, many borrowers were given loans they really couldn't afford in the first place.

Late payment and foreclosure rates will likely continue to rise in 2008. For one thing, tightening credit market conditions and slumping home prices will shut off the refinance valve for more borrowers. For another, lackluster housing market conditions will prevent many sellers from getting out from under their burdensome debts.

Mortgage market carnage continues

Yesterday, Thornburg Mortgage said it received a default notice from JPMorgan Chase after it failed to meet a margin call. The notice was on a $320 million loan; the call was for $28 million. This credit event has triggered cross-default provisions on other borrowings, causing Thornburg shares to plunge in the pre-market this morning (to around $1.50 from $3.40 at yesterday's close).

Meanwhile, the mortgage bond fund Carlyle Capital Corp. has announced that it missed four out of seven margin calls totaling more than $37 million. The fund uses a heap of leverage to invest in AAA agency mortgage bonds (bundles of mortgages backed by Fannie Mae and Freddie Mac). As I noted two days ago, the yield spread on those bonds versus comparable-maturity Treasuries has blown out. That reflects forced selling and increasing concerns in the market about mortgage credit quality.

I should point out there are also rumors ... RUMORS ... that UBS blew out a $24 billion portfolio of Alt-A mortgages at "fire sale" prices -- 70 cents on the dollar. Long story short, there's no rest for the weary in the credit markets.

UPDATE: Another rumor recently making its rounds was that the Treasury Department would come out and announce an explicit (rather than implicit) backing of Fannie Mae and Freddie Mac. That caused 2-year note yields to spike up temporarily. CNBC reports that Treasury is denying it. Wild, wild time in the markets to be sure.

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