Oct
30
Do Banks Have Something To Hide?
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Even experts have a hard time getting a handle on how bad losses might get as the commercial real estate market implodes.
NEW YORK (Fortune) — The banks have taken some lumps since the economy went bad. But some believe their biggest headaches are yet to come.
The pace at which U.S. commercial banks are adding to their loan loss reserves has slowed this year, while loans continue to go bad at a brisk pace.
Despite the optimism of lenders like Wells Fargo (WFC, Fortune 500), some observers warn that banks aren’t socking away enough for a rainier day.
The disconnect is particularly acute in commercial real estate, where lenders are facing a surge of defaults on commercial mortgages and construction loans made when prices were much higher and demand for space much stronger.
Banks have been recognizing commercial real estate losses slowly, even though the high season for defaults isn’t expected to arrive until next year.
That’s not the only problem. Ill-defined or inconsistently applied rules for valuing securities and handling loan modifications can make it hard to say how healthy banks really are, from Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) on down.
The risk is that this year’s recovery could turn out to be a false dawn, delivering another blow to investor trust — not to mention people’s 401(k)s.
“The credibility of the banking system could take another step back,” said Paul Miller, an analyst at FBR Capital Markets. “Everyone is expecting we’ve seen the peak in losses, but it’s impossible to know for sure because you can’t get an apples-to-apples comparison.”
Oct
28
WASHINGTON (AP) — Sales of new U.S. homes dropped unexpectedly last month as the effects of a temporary tax credit for first-time owners started to wane.
The Commerce Department said Wednesday that sales fell 3.6 percent to a seasonally adjusted annual rate of 402,000 from a downwardly revised 417,000 in August. Economists surveyed by Thomson Reuters had expected a pace of 440,000.
It was the first decline since March. Sales in September were off 7.8 percent from a year ago. Despite the surprising decline, the market is up 22 percent from the bottom in January, though down more than 70 percent from the peak in July 2005.
The median sales price of $204,800 was off 9.1 percent from $225,200 a year earlier, but up 2.5 percent from August’s $199,900.
The drop in sales was driven by a nearly 11 percent decline in the West and a 10 percent drop in the South. Sales rose 35 percent in the Midwest and were unchanged in the Northeast.
The report reflects contracts to buy homes, not completed sales. It has been taking longer to close a transaction this year because it’s taking longer to get approved for a mortgage and to have a property appraised.
Those time lags could make buyers nervous they won’t be able to complete the deal before the Nov. 30 deadline to take advantage of a tax credit of up to $8,000 for first-time buyers.
The report “demonstrates the power of the first-time homebuyers tax credit,” said Bernard Markstein, senior economist with the National Association of Home Builders, which has been lobbying Congress to extend and expand the tax incentive. “We just haven’t gotten the economy back to the point where we can step back and say the housing market doesn’t need any more support.”
Congress is considering extending the tax credit through March 31 and gradually phasing it out over the rest of next year. “If they don’t extend it, then I think the pullback could be quite significant,” said Brad Hunter, chief economist with Metrostudy, a real estate research firm.
Critics, however, say many buyers would have entered the market anyway and call the credit an unnecessary subsidy for people who don’t need it.
Low mortgage rates, the tax credit and more affordably priced homes have provided a big lift to the housing market this year. Sales of previously occupied homes, for example, jumped more than 9 percent in September. That report measures completed sales rather than sales agreements.
There were 251,000 new homes for sale at the end of September, down almost 4 percent from August and the lowest inventory in nearly 27 years. At the current sales pace, that represents 7.5 months of supply.
Oct
27
Case Shiller Index: Home Prices in 20 U.S. Cities Rise for Third Month
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Oct. 27 (Bloomberg) — Home prices in 20 U.S. cities rose in August for a third consecutive month, bolstering the case that an economic recovery is at hand.
The S&P/Case-Shiller home-price index climbed 1 percent from the prior month, seasonally adjusted, after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge fell 11.3 percent, less than forecast.
Rising home sales, due in part to government programs including the first-time buyer credit and efforts to lower borrowing costs, have helped stem the slump in property values that precipitated the worst recession since the 1930s. Sustained gains in household spending, the biggest part of the economy, may be harder to come by as joblessness mounts.
“We’re nearing the bottom in home prices,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. “Right now the government is helping to stabilize housing.”
Stocks in the U.S. rose for the first time in three days after the report. The Standard & Poor’s 500 Index was up 0.3 percent to 1,069.70 at 9:39 a.m. in New York.
The housing index was forecast to fall 11.9 percent from August 2008, after a 13.3 percent drop in the 12 months ended in July, according to the median forecast of 33 economists surveyed by Bloomberg News. Estimates ranged from declines of 11 percent to 13.3 percent. Year-over-year records began in 2001.
The gains over the last three months have been the strongest since the three months ended in December 2005.
Broad-Based Improvement
Nineteen of the 20 cities in the S&P/Case-Shiller index showed a smaller decline year-over-year than in July. Dallas showed the smallest drop since August 2008, at 1.2 percent, while Las Vegas showed a 30 percent decrease, the most of any city.
Compared with the prior month, 15 of the 20 areas covered showed an increase while four showed a decline. The biggest month-over-month gain was in San Francisco, which showed a 2.6 percent gain.
In the latest evidence of rising demand, existing home sales in September jumped to a 5.57 million annual rate, more than economists forecast and the highest in more than two years, according to data from the National Association of Realtors issued last week.
Housing and manufacturing are leading the stabilization in the economy, the Federal Reserve said in the Beige Book survey of conditions in its 12 district banks during September and early October.
Fed Regions
“Most districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses,” the Fed said.
One risk to the emerging stabilization is foreclosures, which worsen the property glut. Foreclosure rates will climb through late 2010, peaking only after the unemployment rate reaches 10.2 percent in the second quarter, Jay Brinkmann, chief economist at the Mortgage Bankers Association, said this month.
Unemployment, which is projected to exceed 10 percent by early 2010, according to the median estimate in a Bloomberg survey earlier this month, will also limit demand. Economists and industry groups are among those projecting home sales will also cool in the absence of the $8,000 credit for first-time buyers, due to expire Nov. 30. Lawmakers are debating extending the credit.
Home Builder Stocks
The Standard & Poor’s Supercomposite Homebuilding Index has climbed 22 percent since the beginning of July on the improving outlook for housing, compared with a 16 percent increase in the S&P 500 index. The builder index fell yesterday on concern that the tax-credit program may not be extended.
“The residential housing market appears to have stabilized, but it has done so at a very low level,” William Foote, chief executive officer of USG Corp., North America’s largest maker of gypsum wallboard, said Oct. 21 on a conference call. The Chicago-based company posted its eighth straight net loss last quarter as sales dropped 32 percent from a year ago.
Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.
Oct
23
WASHINGTON – The cascade of bank failures this year surpassed 100 on Friday, the most in nearly two decades. And the trouble in the banking system from bad loans and the recession goes even deeper than the number suggests.
Dozens, perhaps hundreds, of other banks remain open even though they are as weak as many that have been shuttered. Regulators are seizing banks slowly and selectively — partly to avoid inciting panic and partly because buyers for bad banks are hard to find.
Going slow buys time. An economic recovery could save some banks that would otherwise go under. But if the recovery is slow and smaller banks’ finances get even worse, it could wind up costing even more.
The bank failures, 106 in all, are the most in any year since 181 collapsed in 1992, at the end of the savings-and-loan crisis. On Friday, regulators took over three small Florida banks — Partners Bank and Hillcrest Bank Florida, both of Naples, and Flagship National Bank in Bradenton — along with American United Bank of Lawrenceville, Ga., Bank of Elmwood in Racine, Wis., Riverview Community Bank in Otsego, Minn., and First Dupage Bank in Westmont, Ill.
When a bank fails, the Federal Deposit Insurance Corp. swoops in, usually on a Friday afternoon. It tries to sell off the bank’s assets to buyers and cover its liabilities, primarily customer deposits. It taps the insurance fund to cover the rest.
Bank failures have cost the FDIC’s fund that insures deposits an estimated $25 billion this year and are expected to cost $100 billion through 2013. To replenish the fund, the agency wants banks to pay in advance $45 billion in premiums that would have been due over the next three years.
The FDIC won’t say how deep a hole its deposit insurance fund is in. It can tap a credit line from the Treasury of up to a half-trillion dollars to cover the gap.
The list of banks in trouble is getting longer. At the end of June, the FDIC had flagged 416 as being at risk of failure, up from 305 at the end of March and 252 at the beginning of the year.
Yet the pace of actual bank failures appears to be slowing. The FDIC seized 24 banks in July, 11 in September and 11 in October.
If any bank poses an immediate danger to customers or the broader financial system, regulators close it immediately, bank supervisors said. The issue is murkier for troubled banks that might qualify to close but whose closings might still be postponed or even prevented.
The FDIC’s first priority, spokesman Andrew Gray said, is to maintain public confidence in the banking system. “As evidenced by the stability of insured deposits throughout last year, this mission has been a success,” he said.
He said public confidence isn’t reason enough to delay a bank closing, because legally the decision to close rests with whoever chartered the bank — a state or federal agency.
But more than a dozen experts, including current and former regulators, bankers and lawyers, say the FDIC’s mission to maintain public confidence in the banking system contributes to the go-slow approach.
“The FDIC was set up to create confidence and prevent bank runs,” says Mark Williams, a former bank examiner for the Federal Reserve. Being too aggressive about bank closings “can be counter to the mission.”
Sarah Bloom Raskin, Maryland’s top banking regulator, said: “Technically it’s the states who decide, but in reality it’s the FDIC calling you to say” when the bank will be closed.
Last fall, the financial turmoil was rooted in bad bets that the nation’s biggest banks, like Citigroup Inc. and Bank of America Corp., had made on complicated, high-risk mortgage investments.
Smaller banks have been undone by something more conventional — real estate, construction and industrial loans that have soured as the recession has deepened. Defaults are up as developers abandon failing projects and landlords can’t meet their loan payments.
Small- and mid-sized banks hold lots of those loans and have been hurt more than big ones by the sinking commercial real estate market, especially in states like California, Georgia and Illinois. As defaults rise, these banks must set aside more money to cover losses.
For the banks, this means mounting losses and shrinking reserves.
In a healthy economy, Williams said, the Fed and the FDIC would be inclined to close such weak banks. But these days, those agencies and other regulators prefer to hold off, hoping an economic recovery will eventually restore the health of some of the banks.
But the recovery is expected to be slow. Americans remain hesitant to spend money because of job losses, flat wages, tight credit and high debt. Their cutbacks have triggered tens of thousands of business failures.
Abandoned retail space in downtowns and suburban malls means no rental income for property owners. As landlords default on real estate loans, they weaken the banks that hold the loans.
The situation now is especially grave in Southern California, Georgia and Illinois, which have some of the highest home foreclosure rates. Twenty banks have closed in Georgia alone.
Individual bank depositors aren’t at risk when a bank fails. Their money is guaranteed up to $250,000 by the government. Ever conscious of maintaining public confidence, agency officials hammer this point in public statements.
When weak banks are allowed to stay open, their growing losses potentially can drain the FDIC’s deposit insurance fund faster, says Bert Ely, an independent banking consultant.
Federal agencies aren’t the only ones with an interest in slowing the pace of bank closings. State regulators with closer ties to local communities want to avoid the ripple effects when a town loses its main source of consumer and business credit, Williams said.
But finding buyers for wobbly banks has been tough.
FDIC Chairman Sheila Bair acknowledged as much in testimony this month before a Senate panel. The FDIC has been offering to share buyers’ losses on the assets being transferred, she said.
“In the past several months investor interest has been low,” she said in prepared testimony.
In an effort to find more potential buyers, the FDIC has relaxed the rules for private-equity firms to buy banks. In the past, regulators had feared such a move would allow investors to protect themselves from the cost of bank failures, escaping serious consequences while drawing down the FDIC’s fund.
An early success of the new strategy was a deal announced this month to sell assets from Corus Bank of Chicago to a group of private investors. But there still aren’t enough buyers to absorb quickly all the assets held by at-risk banks.
That’s because there are so many weak and failing banks on the market — and so few others strong enough to buy them. That’s one reason it’s hard to know how many more banks could be closed in coming months, said Daniel Alpert, Managing Partner of the New York investment bank Westwood Capital LLC.
“How many banks will survive?” Alpert asked. “Loans are still deteriorating, but there are glimmers of hope in the economy. Ultimately, it’s all about employment.”
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AP Business Writers Marcy Gordon in Washington and Sara Lepro in New York contributed to this report.
Oct
22
The October 2009 National Real Estate Market Report, published by real-time real estate data firm Altos Research, finds asking real estate prices declining in 21 of 26 metro markets. While lagging housing market indicators are just starting to report home price increases from the first half of the year, real-time data shows that by October prices have resumed two months of decline.
Mountain View, CA (PRWEB) October 21, 2009 — While traditional sources for real estate market data are starting to report price increases for the first half of the year, the Altos Research 10-City Composite Price Index has resumed a month-over-month decline. The Altos Composite, which leads traditional housing market data by three to four months, showed seven months of increase in the first half of the year. Home prices as measured by the national real estate market composite decreased by 0.5% during September and 1.1% in the third quarter of 2009. Prices of properties listed for sale fell in 21 of 26 major markets, and rose in just 5 markets according to the Real-Time Housing Market Report, the premier source for real-time statistics on the real estate market.
Oct
20
Builders in the U.S. broke ground on fewer homes than forecast and wholesale prices unexpectedly fell in September, giving the Federal Reserve more reason to keep interest rates low to ensure an economic recovery.
Housing starts rose 0.5 percent to an annual rate of 590,000 from a 587,000 pace in August that was lower than previously estimated, a Commerce Department report showed today in Washington. Prices paid to factories, farmers and other producers fell 0.6 percent, the second drop in three months, the Labor Department said.
Builders may be paring back in anticipation of the end of the government’s $8,000 tax credit for first-time homebuyers on Nov. 30. The decline in producer prices confirms the Fed’s view that inflation is “subdued,” helping Fed Chairman Ben S. Bernanke and fellow policy makers fulfill a pledge to keep the benchmark rate at a record low for an “extended period.”
“Builders are a little bit cautious about the outlook,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “There is still a huge amount of slack in the economy, and downside risks for inflation.”
Builder shares fell after the housing report, with the Standard & Poor’s Supercomposite Homebuilder Index down 2.2 percent at 12:16 p.m. in New York. The Standard & Poor’s 500 Index decreased 0.9 percent to 1,088.53. Treasuries rose, pushing the yield on the 10-year note down to 3.33 percent from 3.39 percent late yesterday.
Economists forecast starts would increase to a 610,000 rate, from a previously reported 598,000 in August, according to the median of 76 projections in a Bloomberg News survey. Estimates ranged from 582,000 to 630,000.
Oct
19
Elsewhere: New Jersey Foreclosures Down 6 Percent From June High
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Lenders started 5,757 foreclosure proceedings against New Jersey homeowners in August – down less than 1 percent from July, according to a state official.
The number of residential foreclosure filings in New Jersey was up more than 40 percent in August over the same month last year, said Kevin Wolfe, a chief in the civil division of the court administration office in Trenton. It was down more than 6 percent from June’s high of 6,133.
Not all homeowners who receive foreclosure notices eventually lose their homes, and state and federal programs have helped thousands renegotiate loans to avoid foreclosure, said Gail Davis, housing counseling supervisor at East Orange-based Tri-city Peoples Corp. She said a majority of her clients are being referred to the mediation programs by their lenders.
“It’s truly a step in the right direction,” she said of the programs. “It has put some guidelines in there, especially for these investors, the private investors, who really didn’t want to do anything.”
More than 2,600 New Jerseyans have gotten counseling through the state’s Foreclosure Mediation Program, according to a statement made earlier this month by Gov. Jon S. Corzine. About 1,450 cases have been completed. And, roughly half of those represented by the completed cases have been able to stay in their homes.
The Obama administration also said roughly 500,000 homeowners nationwide have had their loans modified under the federal “Making Home Affordable” program. A government report, however, questioned whether the administration would reach its objective of preventing 3 million to 4 million foreclosures, much less keep many of those who modified their mortgages from ultimately losing their homes.
The state estimates foreclosure complaints will continue to dip in September to a number significantly below 5,000, said Steve Sigmund, a spokesman for the governor, though very little of the paperwork for that month has been processed yet.
Complaints are the first judicial step in the state toward foreclosure. They tend to be volatile from month to month.
The state’s filings seem to be following a trend.
More up to date national information shows foreclosure filings were reported on 343,638 properties across the country last month, That was a 4 percent decrease in September’s filings from the previous month, but a 29 percent increase from September 2008, according to a report from RealtyTrac.
And, Sigmund said that the state’s governor recognizes that New Jerseyans still have a long way to go before the housing crisis ends.
“We’re not out of the woods,” he said. “Though we can begin to see the end of the path.”
Oct
14
Fitch Ratings: 60% Performing Borrowers Underwater With Majority of Borrowers in U.S
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Fitch estimates approximately 60% of the remaining performing borrowers from the 2006-2007 vintages are in a negative home equity position, or ‘underwater’.
Fitch says no improvement for U.S. RMBS roll rates; 60% performing borrowers underwater With a majority of borrowers in U.S. RMBS transactions owing more on their mortgages than their homes are currently worth, negative home equity is preventing sustained improvement in U.S. mortgage performance, according to the new monthly report ‘Fitch RMBS Performance Metrics.”
Fitch estimates approximately 60% of the remaining performing borrowers from the 2006-2007 vintages are in a negative home equity position, or ‘underwater’. According to Senior Director Grant Bailey, ‘negative equity reduces a borrower’s incentive to pay their mortgage and limits their options when faced with financial difficulties.’ After notable improvement through the first half of this year, the percentage of previously performing borrowers rolling into a delinquency status stabilized at an elevated level through the summer months and increased modestly in the month of September.
The sustained negative pressure on the remaining performing borrowers has also been driven in part by the continued rise in unemployment, which has reached 9.8% nationally and a record level of 12.2% in California, where the greatest percentage of RMBS borrowers is located. As projected in its Oct. 1 ‘Global Economic Outlook’, Fitch projects U.S. unemployment will continue to rise and peak at 10.3% in the middle of 2010.
Oct
7
(Reuters) – A U.S. Federal Reserve report found that banks in the country are slow to take losses on their commercial real estate loans that have been hit by slumping property values and rental payments, the Wall Street Journal said.
Citing a Sept 29 presentation made by Fed analyst K.C. Conway to banking regulators, the paper said the report’s remarks suggested that regulators were preparing for a rerun of housing-related losses that plagued many banks after the residential property bubble burst.
Conway is a senior real estate analyst at the Federal Reserve Bank of Atlanta.
The Journal said a Fed official had confirmed the authenticity of the document, but added it did not represent the central bank’s formal opinion.
Conway’s report predicted that commercial real-estate losses would reach roughly 45 percent next year, the Journal said.
According to the paper, the report said that the most “toxic” loans on bank books were interest-only loans, which get no benefit from amortization, since it requires borrowers to repay interest but no principal.
The Journal said the report also stated that banks have been slow to absorb the losses on their loans, partly due to “capital preservation” concerns.
A spokesman for the Federal Reserve did not immediately reply to a Reuters email seeking comment that was sent outside regular U.S. business hours.
(Reporting by Biswarup Gooptu in Bangalore; Editing by Kim Coghill)
Oct
2
The real estate owned (REO) inventory of government-sponsored enterprises (GSE) Fannie Mae (FNM: 1.41 -3.42%) and Freddie Mac (FRE: 1.64 -5.20%) is near a combined 100,000 single-family properties, according to 10-Q filings with the Securities and Exchange Commission (SEC).
While the rate of growth in the two portfolios has declined, Freddie acknowledges it expects to experience further losses from REO properties.
“While temporary suspensions of foreclosure transfers and recent loan modification efforts reduced the rate of growth in our charge-offs and REO acquisitions during the second quarter of 2009, our provision for credit losses includes expected losses on those foreclosures currently suspended,” the Freddie filing said.