Earlier I posted some graphs on the surge in prime delinquecies from the See: Here is some info on types of modifications: While 185,156 mortgages were modified in the first quarter of 2009, 122,398 were “combination modifications” that changed more than one term of the loan. Of the modifications made in the first quarter of 2009, 70.2 percent included a capitalization of missed payments and fees, 63.2 percent included a reduction in interest rate, and 25.1 included an extended term. By comparison, 12.6 percent of the mortgages received modifications that froze the interest rate, 1.8 percent included a reduction of principal, and 1.1 percent included a deferral of principal. All modification actions during the quarter are indicated in the table below. Since nearly two-thirds of the modifications changed more than one loan term, the sum of the percentages in the table exceeds 100 percent. The types of actions taken have different effects on the borrower’s principal and interest payments and may, over time, have different effects on the long-term sustainability of the loan. Of the nearly two-thirds of modifications that were combination modifications that involved two or more changes to the terms of the loan, 83.4 percent of them included capitalization of missed payments and fees, 86.1 percent included reduced interest rates, 36.3 percent included extended maturities, 12.4 percent included interest rate freezes, 2.8 percent included principal reductions, and 1.6 percent included principal deferrals. Click on graph for larger image. In normal times, a capitalization of missed payments and fees is effective - because usually the homeowner fell behind for a short period because of a lost job or an emergency expense. However, in these times with many homeowners underwater (with negative equity), capitalization isn't very effective. A reduced interest rate or longer term might be helpful. And here are the re-default rates. This graph shows that about 30% of modified loans...

Delinquencies and foreclosures on first-lien mortgages continued to increase during the first quarter of this year, but loan modifications also increased and the trend continued toward more sustainable modifications with lower monthly payments, according to a report issued today by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS).

submits: at Rortybomb wades into the CRA debate with a very good point: toxic subprime loans bear almost no relation to CRA loans. 80% of the subprime mortgages expired in 30 months; they perpetually had to be refinanced. 75%+ of subprime mortages had a prepayment penalty. This is not at all what CRA loans looked like. CRA rooted for solid, longer-term mortgages.

WASHINGTON (Reuters) - World Bank President Robert Zoellick said on Tuesday that financial markets are showing signs of stabilization, but warned that the global crisis was far from over in developing countries.

The Obama administration sent Congress a detailed proposal on Tuesday to create a consumer protection agency responsible for financial products, a move that marks the first shot in a heated battle with banks and other financial institutions over how to regulate home mortgages, credit cards and other forms of lending.

Few topics are quite as polarizing as the “savings glut.” The very term is considered to shift responsibility for the current crisis away . That is unfortunate. It is quite possible to believe that the buildup of vulnerabilities that led to the current crisis was a product both of a rise in savings in key emerging markets, a rose that with more than a bit of help from emerging market governments – produced an unnatural uphill flow of capital from the emerging world to the advanced economies, and policy failures in the U.S. and Europe. The savings glut argument was initially to suggest that the United States’ external deficit was a natural response to a rise in savings in the emerging world – and thus about . But it was equally possible to conclude that the rise in savings in the emerging world reflected policy choices* in the emerging world that helped to maintain an uphill flow of capital – and thus that it wasn’t a natural result of fast growth in the emerging world. This, for example, is the perspective that Martin Wolf takes in his book . Wolf consequently believed that borrowers and lenders alike needed to shift toward a more balanced system even before the current crisis. From this point of view, the savings glut in the emerging world — as there , only a glut in some parts of the world — was in large part a result of product of policies that emerging market economies put in place when the global economy — clearly spurred by monetary and fiscal stimulus in the US — started to recover from the 2000-01 recession. China adopted policies that increased Chinese savings and restrained investment to try to keep the renminbi’s large real depreciation after 2002 – a depreciation that reflected the dollar’s depreciation – from leading to an unwanted rise in inflation. The governments of the oil-exporting economies opted to save most oil windfall – at least initially. Those policies intersected with distorted incentives in the US and European financial sector – the incentives...

The Committee for a Responsible Federal Budget has an interesting report on the Long as reported by the Congressional Budget Office. Let's take a look. Last week, the Congressional Budget Office (CBO) released its Long-Term Budget Outlook. The reports suggests a brief window in which deficits subside a bit, after which the effects of health care cost growth and population aging will drive them rapidly upward and bring the national debt to unprecedented and intolerable levels. Under current law, CBO projects debt held by the public will rise from less than 40 percent of GDP before the economic crisis to nearly 100 percent by 2040 and 300 percent by 2083. If current policies are continued, CBO projects the debt will rise to 100 percent by the early 2020s, to 200 percent before 2040, and eventually to 750 percent. Ultimately, revenue increases and/or spending cuts will be necessary to prevent “a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges.” Ever-Growing Deficits If we continue on our current path, according to the CBO, deficits will persist and grow, driving public debt to untenable levels. The CBO makes two sets of long-term projections: the “extended baseline scenario,” which essentially assumes current law, and the “alternative fiscal scenario,” which assumes policy makers continue a number of current practices such as maintaining physicians payments in Medicare, continuing to patch the Alternative Minimum Tax, renewing the 2001/2003 tax cuts, and allowing discretionary spending to grow with GDP rather than inflation over the next decade. Rising deficits are caused by spending growing considerably faster than revenue. Projected spending increases come mainly from the growth of Medicare and Medicaid, and to a lesser extent Social Security. Although a relatively small portion of our budget today at 1 percent of GDP, interest on the debt would grow to consume 12 percent of GDP by 2080 under...

Major stock indexes were little changed in early trading on the final day of the second quarter.

Data through April 2009, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that, although still negative, the annual decline of the 10-City and 20-City Composites improved.

submits: This first chart is reality, no Kool-Aide here. click to enlarge This next chart is where we see Freddie Mac (FRE) getting out the ice cubes and sugar. I love the chart title “Delinquencies are low relative to the industry.” How about this for a title: “Were only on fire a little bit” or “We may be in trouble but look at the other guys” or my favorite title option: “The blue elephant in the living room isn’t as big as the green elephant in the kitchen.” So let’s see, in 2003-2006 Freddie Mac bounced around 50 basis points. Today they’re at 229, or a 457% increase from where they were). But thank Alan Greenspan almighty! Freddie Mac is not as bad off as the rest. I think I am going to go out and buy FRE, it’s only .65/share. Disclosure: No positions

submits: One of the two important things I learned in law school was that "if you torture statistics, they will tell you anything." Over the last week, a pile of stats have been reported on the complexity of the creation of the housing bubble creation. This is a classic tactic of lawyers and politicians: when you are losing the argument, change or complicate the discussion. The question is how much blame should each involved party receive for the bubble, and what should the punishment be; if it is the government's fault, get rid of programs and elect non-meddling politicians; or, if it is finance's fault hire a new bureaucracy and pass new laws to try to prevent recurrence.

A new survey conducted by the Kellogg School of Management in Chicago suggests that more than a quarter of mortgage defaults are strategic, especially when negative equity exceeds 15 percent. The study, “Moral and Social Restraints to Strategic Default on Mortgages,” compares the current housing crisis to the Massachusetts housing market during the 1990-91 recession, discovering [...]

Concern over Japanese deflation is increasing. Please consider . Japan’s consumer prices fell at a record pace in May, adding to the risk that deflation will become entrenched and hamper a rebound from the nation’s worst postwar recession. Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. It was the sharpest decrease since comparable figures were first compiled in 1971. Bank of Japan Governor Masaaki Shirakawa said last week that price declines will accelerate through the middle of the fiscal year as demand slackens and crude oil continues to trade lower than last year’s record. Retailers including Aeon Co. are cutting prices to attract customers as falling wages and the worsening job outlook damp spending. “Profits fall, then wages come down, then consumers stop shopping,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “And because people aren’t shopping, companies lower prices. That’s the process that we’re starting to see. It isn’t easy to break out of.” “With demand deteriorating, companies are finding it more difficult to sell goods and services and are turning to discounting,” said Azusa Kato, an economist at BNP Paribas in Tokyo. Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper plan to lower prices in the year ending March 2010 to spur sales, up from 9 percent a year earlier. Aeon, Japan’s second-largest retailer, this week started a discount campaign for confectionary, drinks and mayonnaise. Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 11 months. Japan only escaped from a decade of deflation in 2005. Japanese Deflation Deepens As Japanese deflation deepens, . Japan’s bonds gained for a second week as a government report showed...

submits: from Friday June 26 contained the first part of this discussion. Today I would like to continue the discussion and there are two reasons for doing so. The first reason is to understand just what the Federal Reserve has been doing over these last nine months. The second is to understand how likely it might be for the Federal Reserve to “unwind” what it has done over the past nine months and reduce a part of the fear of future inflation. Note, I am not including any discussion of future government deficits and the probability that they will be “monetized.” There is no doubt in my mind that the Federal Reserve has “printed” a lot of money since early September 2008, most of it before January 2009. The Monetary Base (Non-seasonally adjusted, NSA) rose from $847 billion in August 2008 to $1,712 billion in January 2009, an increase of $865 billion. Between January and May 2009, the Monetary Base only rose $63 billion.

Mad props once again to Zerohedge . I'm not going to take from their discussion of The Fed buying up paper at what will (almost certainly) lead to ruinous losses - you can find that there. Rather, I am going to look at some of the internals from the document published that they didn't focus on. Specifically, I'm going to go after a couple of graphs. Let's start with this one (click any for a larger copy): This seems to show very small declines in home prices. Or does it? The very next graph says.... Wait a second! Now its down ~20%? Hmmmm.... that's more like what everyone would expect Freddie to report. Ok, we'll go with that one. But but but what does this do to the LTV of their portfolio? I bet you can guess! That's a very serious problem. See, Freddie has a lot of loans on their books that are rather old and have a lot of amortization behind them. That is, lots of principal paid down. But the newer loans have much less principal paid down and in many cases are underwater. This has driven an insane deterioration in actual credit quality of the portfolio as a whole. In fact that single slide ought to peel your whig back. If it doesn't, these two will: and immediately following it: Notice that up until 2007 there were no loans with more than a 100% loan-to-value ratio in their portfolio. Freddie (and Fannie) detonated because they were operating with an 80:1 leverage ratio, a number that was demonstrably unsound . Regulators, including Lockhart, Treasury and The Fed, allowed not only Freddie and Fannie but also the FHLB system to operate into this environment with deteriorating fundamentals even though as you can see the deterioration that would cause their explosion was evident in 2007. NOTHING WAS DONE ABOUT IT. There is no solution to this problem folks. These firms have in the neighborhood of five trillion dollars outstanding in either loans or credit guarantees. The Fed has been furiously buying up these securities even though the...

The impact of the crisis on bank profits is a central feature of this year’s Top 1000 listing,with total profits of the listed banks plunging 85.3% from $780bn to $115bn and return on capital sinking from 20% in 2008’s ranking to a paltry 2.69%.

It seems like a long time off, but the Fed is going to eventually have to withdraw all of the excess liquidity it has created when the economy recovers. However, doing so will prove tricky. First, we have debt deflationary situation in the United States which could lead to a serious double-dip if a restrictive monetary policy is applied too early. Moreover, the Federal Reserve has added a considerable amount of non-Treasury assets to its balance sheet. Selling these assets on or even returning to their rightful owners those assets used as collateral for loans from the Fed will be a mean feat. This is one reason that many are pointing to inflation as a worry already. In that vein, David Greenlaw at today about a timetable for withdrawing the excess liquidity. Three phases of an exit strategy. In our view, there are three phases of an exit strategy: passive, active and rate hikes. Some of the special liquidity facilities that were introduced by the Fed in response to the credit turmoil will wind down of their own accord – indeed, several of the largest programs are already showing such a pattern. This is what we refer to as a ‘passive’ exit. Other programs, such as the Treasury, agency and MBS open market purchases, will require a more active approach. While we view outright sales as unlikely due to potential significant market disruption and political constraints tied to recognizing loses, there are several other tools that might be employed (such as reverse RPs, expanded SFP bill issuance, reserve requirement changes, etc.). The Fed can and should provide specifics on its approach to the ‘active’ portion of the exit strategy in the not-too-distant future, in our view. Also, the Fed will likely need to adopt tools that will allow it to push the fed funds rate higher prior to complete exit from QE. As we learned in late 2008, the interest on reserves program does not necessarily put a hard floor under the federal funds rate. Although the Fed believes – and we concur –...

submits: Total Federal Reserve balance sheet assets for the week of June 24 of $2,048 billion consisting of: Securities held outright: $1,207 billion (an increase of $30.8 billion, resulting from $14.7 billion in new Treasury purchases while Fed Agency debt increased by $12 billion, following last week's record $30 billion spike: the result - slight moderation in mortgages, at a cost of $42 billion over the past two weeks) Net borrowings: $458 billion (unchanged as H.3 statement still not updated) Float, liquidity swaps, Maiden Lane and other assets: $382 billion ($35.6 weekly decrease billion due to a continued reduction in Central Bank Liquidity Swaps, by an unprecedented $28.7 billion, to the lowest level since the Lehman collapse at $121 billion, after peaking at nearly $600 billion in December: so who pays when Latvia and Russia finally do implode, and also an $8 billion reduction in CPFF outstandings) Foreign holdings of USTs and Agencies in creased by $12.3 billion to $ 2,764 billion from $2,751 billion in the prior week. For anyone who wishes to back into the Indirect Purchases calculation from last week, this is the best data. Something tells me the ratio of weekly increase as disclosed on H.4.1 compared to the Indirect Holding table will be around 20%, meaning the Treasury is fudging the Ind Holdings calc by about 80%!

New-home sales are suffering more than those for existing homes in this recession, which isn’t what usually happens.

NEW YORK (MarketWatch) -- Dresdner Kleinwort Securities has withdrawn from the Federal Reserve's primary U.S. government security dealers, the U.S. central bank said Friday. The change is net neutral in terms of numbers as a new dealer just came online, but in general this is a major net negative for the Treasury market. Why? Because being a primary dealer is, in general a license to print money. You get to field customer orders for Treasuries and make your spread, and you have a privileged trading position with The Fed. There's only one fly in the ointment, and that is that the position comes with a requirement that you bid. This is distinct from most other nations where no such system exists, and essentially guarantees that there can never be a "failed" Treasury auction. There was no reason cited for the withdrawal but one can surmise that the issue is that they're stuffed to the gills with Treasuries and are finding it difficult or impossible to earn their spread, think there is a material safety risk in their participation (e.g. getting stuck long with a deteriorating position), or both. Either way there is no possible means to read this as bullish. While the issue may be with their liquidity demands and thus not reflect severely on the Treasury market with the issuance that has gone on this year and will for the foreseeable future I wouldn't take that bet. The "Chosen" or "Protected" dealers will of course never withdraw but if the changes made to reporting of indirect bid are in fact concealing deteriorating demand and these folks have detected a potential problem in the offing we are fixing to get a severe spanking in our government debt issuance in the near future. Beware.