15 May 2009

New Financial Crisis Data Points

* The amount produced by the manufacturing industry in the United States is now down 16% from its December 2007 peak. Just 69.1% of available U.S. industrial product capacity is currently being used, the lowest level since capacity utilization data were first collected by the Federal Reserve in 1967.

* Commercial and multi-family housing mortgage lending has fallen by more than 86% from the peak mid-2007 levels.

Similar to residential, Fannie and Freddie are just about the only game in town. Conduit lending has essentially stopped for commercial real estate. Commercial bank and life insurance lending has slowed dramatically.

Lending is off across all property types, but especially for: Retail lending (off 90% from the peak originations), office lending (off 93% from the peak), and hotel lending (off 99% from the peak).

I have previously blogged the near complete demise of subprime and Alt-A lending. Prime residential mortgage lending is still going on, and commercial mortgage lending isn't zero, but the real estate industry's collapse is not over.

* Default rates on prime residential mortgages have jumped to 2.4% in April, but I am skeptical that these loans will impact the larger real estate market in the way that subprime and Alt-A default rate surged did, because the baseline default rate on prime mortgages was so much lower to start with, and because foreclosures on homes with prime residential mortgages may produce much smaller losses than those with low down payment loans.

Investors in low down payment loans (a good proportion of which were second mortgages secured by the top twenty-percent of the home's equity at the time of purchase) were relying on credit default swaps and underwriter guarantees, both of which went bad due to "counterparty risk." In contrast, investors in prime residential mortgages can take only modest losses, even if property values decline by more than 20%, because they are first liens and the owner has cushioned the first 20% of property value declines for them. Fraud is also less likely to come up in prime loans, because the underwriter and investor were more often the same entity, and hence had an incentive to be more careful. The care taken by banks in underwriting mortgages when not playing with someone else's money is reflected in stories like this one.

No comments: