Paper Money - A US Real Estate Bubble Blog

Ticking Time Bomb?: Fannie Mae Monthly Summary October 2008

Posted: 01 Dec 2008 01:47 PM CST

Decades from now the summer of 2008 will likely be remembered to mark the turning point where legislative blundering took an otherwise serious financial crisis and molested it into an epic financial collapse.

By fully assuming the liabilities of Fannie Mae and Freddie Mac, the two colossal and corrupt (and conduit of corruptness funneling junk Countrywide Financial loans onto the implied balance sheet of the federal government) government sponsored enterprises, the federal government, led by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke, has thrust taxpayers into an abyss of insolvency with one mighty shove.

Given the sheer size of these government sponsored companies, with loan guarantee obligations recently estimated by Federal Reserve Bank of St. Louis President William Poole of totaling $4.47 Trillion (That's TRILLION with a capital T… for perspective ALL U.S. government debt held by the public totals roughly $4.87 Trillion) this legislative reversal making certain the "implied" government guarantee is reckless to say the least.

The following chart (click for larger) shows what Fannie Mae terms the count of "Seriously Delinquent" loans as a percentage of all loans on their books.

It's important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers and that should they report the delinquent results as a percentage of the unpaid principle balance, things might likely look a lot worse.

Finally, the following chart (click for larger) shows the relative movements of Fannie Mae's credit and non-credit enhanced (insured and non-insured) "Seriously Delinquent" loans.

Question(s) of The Day - In Recession ... Now How Long?

Posted: 01 Dec 2008 11:27 AM CST

The NBER today announced that the recession is official… it started in December 2007 and by all accounts we are fully entrenched and sliding still lower.

Anyone surprised?

Why was there ever a debate?

Now though I suppose the Bear-Bull squabbling will shift to how long… How long will this recession run?

Bernanke’s Nightmare: Commercial Paper December 01 2008

Posted: 01 Dec 2008 10:51 AM CST

This post is a follow up and further elaboration showing the current and historical values for some key interest rates.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to "raise needed cash for current transactions".

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve's target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has remained dramatically elevated at 586 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 90 basis points.

Construction Spending: October 2008

Posted: 01 Dec 2008 10:18 AM CST

Today, the U.S. Census Bureau released their October read of construction spending again demonstrating the significant extent to which private residential construction is contracting particularly for single family structures while non-residential spending appear to have begun to show the telltale signs of contraction.

With the tremendous weakening trend continuing, total residential construction spending fell 24.20% as compared to October 2007 and 49.91% from the peak set in March 2006.

Worse off though was private single family residential construction spending which declined 41.02% as compared to October 2007 and a truly grotesque 65.06% from the peak set in February 2006.

Non-residential construction spending, currently accounting for just under half of all private construction spending, has been expanding at a slower rate in recent months with October showing a 9.09% increase as compared to October 2007.

As was noted in prior posts, commercial real estate (CRE) appears to be coming under some pressure with reports of increasing vacancy rates and falling prices and now a back-to-back monthly decline in spending.

Keep your eye on the last two charts in the months to come for a clearer indication of a pullback.

The following charts (click for larger versions) show private residential construction spending, private residential single family construction spending and private non-residential construction spending broken out and plotted since 1993 along with the year-over-year and peak percent change to each since 1994 and 2000 – 2005.