FASB Chairman Says New Mark-To-Market Guidance Out in "Weeks"

Financial Accounting Standards Board Chairman Robert Herz testified at the House Securities Subcommittee today saying that the agency will introduce new guidance within three weeks about flexibility for companies when it comes to the controversial accounting rules.

"We're going to continue putting more guidance out there."

"For certain situations we may provide some additional guidance for when not to use market based fair value rules, then we have to provide some adjustments."

FASB's Herz talked about a proposal the agency announced last month that it would examine whether a market for an asset or liability is active or inactive. The agency is also considering whether accounting rules need to change when a transaction is distressed or whether investments in hedge funds and private equity shops should be treated more simply from an accounting point of view.

Bernanke: We Need Improvements to Fair Value Rules

Comments from Bernanke at a Council on Foreign Relations event in New York today:

"We all acknowledge that in periods like this when some markets don't exist or are highly illiquid that the numbers that come out can be misleading or not informative."

"We need to provide more guidance to financial institutions about what are reasonable ways to address the valuation of assets that are traded at all in highly problematic markets.

Bernanke did not provide details about what kind of changes he would like to see to mark-to-market rules.

Thank you Captain Obvious

Detox for Troubled Assets

From the Washington Post:

The government's plan to strip banks of troubled assets could force some firms to record large losses, but the painful purge would help restore confidence in the banking system, according to Sheila C. Bair, chairman of the Federal Deposit Insurance Corp.

Bair said yesterday that the effort might require more money than the $700 billion Congress has approved to aid the financial industry, but she added that taxpayers would probably reap an eventual profit on the asset purchases.

She said the greatest challenge was persuading banks and taxpayers to accept the necessity of the costly program.

"This takes courage to do, but if we don't do it, history shows that this kind of mechanism -- recognize the losses, get at the root of it and move on -- this is how you jump-start the economy. The other option, just to park those assets on the balance sheet, I don't think that gets us very far," Bair said in a discussion with Washington Post reporters and editors.

The government plans to partner with private investors to buy troubled assets, in part by providing financing at low cost. Bair and other federal officials said discussions were ongoing about the appropriate extent of the federal subsidy. A larger government contribution would allow investors to pay higher prices, limiting the losses that banks would record but also exposing taxpayers to greater risk.

The administration hopes to find the right balance and announce the details within the next two weeks, possibly as soon as next week, according to people familiar with the matter.

Since the early days of the crisis, plans have circulated to buy troubled assets, such as distressed mortgage loans, from banks. The Bush administration requested $700 billion from Congress to fund such a program, then instead decided to inject most of the money directly into companies. Bair said yesterday that the original plan to buy assets faltered in part because of concerns about the cost.

"What the pricing looked like, what the losses would be, I think that's what stymied this effort before," she said.

Bair, who remained in office after the election as the head of the independent FDIC, said the Obama administration appeared to understand the need for the program. She said buying troubled assets would create a clear strategy for ending the government's intervention in the banking system, something investors are eager to see.

The government's approach would involve investment partnerships with money from both private investors and the government. The government would establish multiple funds to compete with one another, creating a market that would determine prices.

Bair calls the initiative an "aggregator bank", though Treasury officials contend that the partnerships should be called "public-private investment funds."

The funds would use that capital to borrow more money, in much the way that a home buyer makes a down payment to take out a mortgage from a bank. In this case, the loan would be likely to come from the Federal Reserve. In a theoretical example, to raise $10 million, the government and the private investors might each contribute $1 million, and then borrow $8 million from the Federal Reserve. The government and private investors also could contribute different shares. Officials said the proportions remain under discussion.

The funds would use the money to buy toxic assets from banks. The private investors would manage the funds and determine how much to pay for the assets. That would allow the government to benefit from their expertise and desire to maximize profits.

The plan emerged from discussions about creating a "bad bank," in which a company's troubled assets are split off and placed in a new company, leaving behind a "good bank." Bair said the term "bad bank" was misleading because the structure of the deal should benefit both sellers and buyers.

"You end up with two healthy institutions," she said. "It's not a good bank and a bad bank; it's an aggregator bank with good upside potential because it bought at good discounts and you've got a clean balance sheet over here with an opportunity to raise private capital."

Bair emphasized that banks forced to take large losses might not need more government money because, newly cleansed, they would be in position to raise money from private investors. She said the size of the write-downs actually could be a positive, by establishing that banks are free of their problems.

"The thing that really makes people gulp about this is the size of the hole, but we view that as a strength and not a weakness," she said.

Other banks could be forced to raise money from the government. And she said it was possible that some banks would take losses too large to survive.

A key issue that has derailed past plans to buy troubled assets is the large gap between the prices banks consider fair and what investors are willing to pay.

Bair said part of that gap reflected the cost of borrowing money, because fear continues to hang over the financial markets. She said the government can eliminate that portion of the difference by providing low-cost financing.

"One of the reasons that prices are distressed right now is because of the lack of financing to make purchases," Bair said. "The government, by providing low-cost funding, it will help to tease out that liquidity premium from the pricing and hopefully get the pricing a little higher."

Even so, the losses faced by banks could be steep, raising the question of how many banks will be willing to participate. The government already has made it easier for banks to borrow money and has provided banks with fresh capital. Some banking executives have questioned why they should sell assets at a loss rather than simply hold them and wait for prices to improve.

So the plan is not to fund the banks directly, but to pay inflated prices (based on the idea that lack of financing not underlying loss value) is the problem?

Thomas Jefferson on Banking

The monetary system is a bit different today than in the age of Jefferson...or is it?

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802) 3rd president of US (1743 - 1826)

Given current Treasury actions, it could be argued that there is not much difference between private banking in the age of Jefferson and having issuing power in the hands of the "people" today.

Recipe for Disaster: The Formula That Killed Wall Street

Must reading from Wired Magazine on the simple and mathematically elegant formula that purported to model default correlations without considering actual historical default data. This formula was used to price hundreds of billions of dollars worth of CDOs.

Best quote of the article comes from Nassim Taleb:

"Co-association between securities is not measurable using correlation. Anything that relies on correlation is charlatanism"

Genius


And a bad idea never dies.............

A Financial Crisis Reading List

From Louise Francis at Actuarial Review:

Stories related to the current financial crisis have come to dominate our media. Because of its widespread impact on both individuals and businesses, it is no longer a subject just for the business pages. As individuals and as insurance professionals, we are affected by it. The crisis has damaged a number of insurance companies including some that insured subprime and unconventional mortgages or invested in derivatives based on pools of mortgages or indulged in the now infamous credit default swaps that insured subprime mortgages. For the interested business reader, the crisis provides a high-profile example of the failure of risk management procedures and financial product valuation models.

I recommend the following annotated reading list for those who wish to broaden their understanding of financial crises, the causes, consequences, and possible solutions. The list includes books dealing with past financial debacles, such as The Great Crash, and books specifically addressing the current crisis, such as Chain of Blame. In general, the books on this list are not burdened with a lot of technical detail and a number are highly entertaining.

The Great Crash of 1929 by John Kenneth Galbraith
The greed, irrationality, mass delusion, and excessive use of leverage and exposure to risk that brought about the Great Depression of the 1930s is described in this book. It is entertaining reading and describes everything that is happening in the current crisis, though specific details of the manifestation of irrationality and chicanery have changed.

When Genius Failed: The Rise and Fall of Long Term Capital Management by Roger Lowenstein
This is the very entertaining morality tale about the failure of Long Term Capital Management in the late 1990s. It also describes a great example of the colossal failure of a risk management program due to greed, overconfidence, and the modelers’ (including a couple of Nobel Prize winners) naïve belief that reality should conform to their models, rather than considering how well the model approximated the real world.

Chain of Blame: How Wall Street Caused the Mortgage and Financial Crisis by Paul Muolo and Matthew Padilla
In this book, two financial investigative reporters provide many previous unknown details about the key actors in the mortgage and credit crisis, from well known players like Angelo Mozilo to the more obscure Roland Arnall.

Reinventing Collapse: The Soviet Example and American Prospects by Dmitry Orlov
This short book by a Russian immigrant who witnessed the collapse of the Soviet Union describes how Americans might respond if faced with a similar crisis.

Financial Armageddon: Protecting Your Future from Four Impending Catastrophes by Michael J. Panzner
The first edition was written before the subprime blowup, but predicted it. Aimed at the individual investor, the author warns of four threats to one’s financial well-being: public and private debt, mortgages and mortgage-backed securities, hidden promises that will not be met, and the retirement time bomb. The author predicts a deepening of the current financial crisis and believes a depression is likely, providing advice for surviving it.

Crash Proof: How to Profit from the Coming Economic Collapse by Peter D. Schiff and John Downes
This book—targeted at a general audience—predicted the bursting of the housing bubble and the current financial crisis. The author compares the United States to a playboy who inherits a huge fortune and then dissipates it. He explains how the economy evolved to its current crisis state and predicts a further worsening of economic conditions. The book contains specific investment advice for individual investors.

Irrational Exuberance by Robert J. Shiller

The Subprime Solution: How Today’s Global Financial Crisis Happened and What to Do about It by Robert J., Shiller
Robert Schiller coined the term “irrational exuberance” in the mid-1990s. Unfortunately his warnings about the bubble created by irrational investor behavior were ignored, and we experienced the bursting of the tech bubble after this book was written. This is still a classic that is relevant to the current crisis, and a second edition was published in 2006. In the Subprime Solution, Shiller provides an overview of the causes of the current crisis and his proposed solutions. One of his theories is a worldwide bubble psychology social contagion that spreads in a manner similar to that of a disease epidemic.

Speculative Capital: The Invisible Hand of International Finance, Vol. 1. by Nasser Saber
This book provides a critique of modern finance theory. It also describes how the global economy has shifted to one increasingly dominated by speculative capital. According to the author, speculative capital, under the guise of arbitrage, may reduce the financial system’s exposure to certain kinds of risk, but the price is that exposure to global systemic risk is greatly increased. This book explains how the current structure of financial markets will almost inevitably result in financial crises.

Fooled by Randomness: The Hidden Role of Chance in Life and the Markets by Nicholas Taleb

Black Swan: The Impact of the Highly Improbable, by Nicholas Taleb
Both of these books describe the behavior that led to the current financial crisis. Fooled by Randomness is more concerned with overconfidence and self-delusion on the part of managers and traders that cause them to take on excessive risks that inevitably lead to disaster. Black Swan is more concerned with extreme events and the widespread tendency to ignore the possibility of their occurrence. It addresses the ubiquity of the use of normal/lognormal distributions despite their inapplicability to real-life situations. Taleb is one of the most widely quoted experts on the current financial crisis.

FRBSF: How Will a Credit Crunch Affect Small Business Finance?

FRBSF outlines the different sources of credit for small banks and their customers, and which of those sources are likely to dry up in a credit crunch:

How Will a Credit Crunch Affect Small Business Finance?, by Gregory F. Udell, FRBSF Economic Letter: There is considerable concern about the duration and severity of the credit crunch caused by the current financial crisis. Some evidence indicates that this could become one of the worst credit crunches in recent history. Economists generally define a credit crunch as a significant contraction in the supply of credit reflected in a tightening of credit conditions. A key barometer of credit conditions, the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices, showed a record level of tightening in October 2008 over the previous three months. For large firms, 84.4% of the largest surveyed banks and 82.6% of the smaller surveyed banks reported a tightening of credit standards. For smaller firms, 71.9% of the larger banks and 78.3% of the smaller banks reported tightening. None of the surveyed banks reported any easing of standards. The January 2009 survey also showed severe tightening—though not quite as dramatic as the October numbers. For large firms, 65.5% of large banks and 62.5% of smaller banks cut back credit over the three-month period. For small firms, the percentages were 67.8% and 70.9% respectively. Just as in October, no banks reported any easing over the period.

Small businesses may be particularly vulnerable to a credit crunch. Small companies do not have access to the capital markets. Thus, their sources of external financing are much more limited than large corporations. If these sources shrink, small businesses could be adversely affected. This Economic Letter explores how the credit crunch might affect small business access to finance. While it is not possible to know how severe this credit crunch will become, researchers can explore how the crunch could affect small business finance. We begin our analysis by looking at how small businesses access external sources of finance. Then we consider how these sources might be affected by the crunch.

How do small U.S. firms obtain external financing?

Not surprisingly, the largest source of external finance for U.S. small businesses is commercial banks. However, small business finance is more complicated than this for two reasons. First, there are many different types of financing—even different types of bank financing. These are sometimes referred to as lending technologies (see Berger and Udell 2006). Second, there are other sources of financing in addition to banks. To get a more complete picture of small business financing we need to look more closely at these two dimensions.

Small business lending can be divided into nine lending technologies, based on the primary method by which loans are underwritten. These technologies can be categorized as either relationship-based or transactions-based.

The first category is relationship lending, in which underwriting depends primarily on soft (that is, nonquantifiable) information about the borrower generated by the lender. This includes an assessment of the managerial skill of the entrepreneur and the firm’s business strategy. Under relationship lending, the borrower receives multiple financial services from the lender over time, which allows the lender to accumulate information about the borrower. Relationship lending is ideally suited for small businesses that are opaque (because they lack audited financial statements) and lack significant amounts of hard assets that can be pledged as collateral.

Most lending technologies are not based on soft, relationship-based information, but rather on hard, transactions-based information that is easily quantifiable, electronically storable, and readily communicated within the lending institution. Financial statement lending is one of these transactions-based technologies. In this type, hard information culled from audited financial statements and ratios calculated from these statements are the primary sources of information. Small business borrowers with financial statements tend to be larger and more transparent, and tend to show strong financial ratios.

The remaining transactions-based lending technologies can be used for small firms regardless of their transparency. Asset-based lending provides working capital financing to riskier small businesses. Asset-based loans are secured by accounts receivable and inventory and involve intensive, continuous collateral monitoring to calibrate maximum loan advances. Because asset-based lending is principally underwritten on the basis of specific collateral, the level of firm transparency is relatively inconsequential.

Factoring is similar to the accounts receivable side of asset-based lending, except that instead of lending against receivables the lender purchases the receivables. Equipment lending and real estate-based lending are technologies in which loan underwriting is principally based on the appraised value of the underlying assets pledged as collateral. Leasing is quite similar, except that it involves renting fixed assets. These lending technologies are well-suited for opaque small businesses because loans are primarily underwritten based on the value of underlying assets instead of firms’ business prospects.

Small-business credit scoring is a relatively new lending technology, used mostly by larger banks, based on statistical default models and targeted explicitly to opaque microbusinesses that typically borrow less than $250,000.

The final lending technology is trade credit. Economists debate whether trade creditors deploy a unique underwriting technology. Some argue that trade creditors have a special advantage because of their knowledge of their borrower’s inputs. Others argue that trade creditors merely employ one or more of the technologies listed earlier. Thus, it is not clear whether trade credit is principally a relationship-based or a transactions-based technology.

The other dimension of small business lending focuses on the source of finance. Banks are certainly important, but a distinction should be made between large and small banks. Some evidence indicates that small banks may be better at making relationship loans based on soft information because this does not have to be communicated through the bank’s bureaucracy as part of the credit decision-making process. Large banks may have an advantage in some of the transactions technologies because of economies of scale (see Berger et al. 2005). Also, in the past large banks and small banks have not necessarily behaved identically in terms of tightening credit standards. For example, during the credit crunch of 1990–1992 the portfolio allocation away from lending was proportionately less for small banks than for large banks (see Berger and Udell 1994).

Banks are not the sole source of small-business financing. On average, small businesses obtain about half of their financing internally and about half externally. Of this external financing, banks and other depository institutions provide about 40%, trade creditors about 30% and commercial finance companies (CFCs) about 10%. Private individuals provide most of the remainder, either as loans or equity infusions (see Berger and Udell 1998).

How might the credit crunch affect small business finance?

To address this question, we can link lending technologies and financing sources to identify lending channels. A two-dimensional lending channel specifies a lending technology and a source of finance (see Taketa and Udell 2007). Figure 1 shows lending channels to small business during normal times. Note that some lending technologies are delivered by multiple sources.

Three lending technologies are delivered solely, or at least primarily, by only one source. Relationship lending appears to be primarily delivered by smaller banks, small business credit scoring by large banks, and trade credit by corporations.

Some lending channels may contract significantly during a credit crunch. Empirical evidence suggests that, during the 1992 credit crunch, bank lending channels contracted. However, some evidence suggests that certain other lending channels expanded during this period.

Many in the asset-based lending industry argue that commercial finance companies expanded this lending channel during the 1992 credit crunch and enjoyed some of their most profitable years as small and mid-sized companies were “crunched out” of bank lending channels and moved to this alternative source (see Udell 2004). However, it is not clear that commercial finance companies can play this role in the current credit crunch. Since 1992 many large independent commercial finance companies have disappeared. Moreover, many other larger commercial finance companies have been acquired by commercial banks. The banks’ own problems could have a spillover effect on their commercial finance affiliates. Further, both the independent and the affiliated large commercial finance companies could see their funding constrained by tightening in the commercial paper market. Smaller independent commercial finance companies that are not affiliated with banks might be able to pick up some of the slack. However, these smaller independent finance companies typically depend on banks or larger finance companies for their own financing and could feel the effects of the credit crunch themselves.

So far, the most visible lending victims in the current financial crisis have been the largest banks. If these banks wind up being hit the hardest by loan losses, then the small-bank lending channels might expand to pick up the slack. However, small banks could ultimately be hit by loan losses proportionately as much as large banks. One cause for concern is that small banks expanded real estate exposure as much as large banks earlier in the decade. If small banks tighten as much as or more than large banks (as appears to be indicated by the loan officer survey data), small businesses that depend on relationship lending could be hit especially hard.

Both large-bank and small-bank real estate-based lending channels may be particularly vulnerable because real estate lies at the heart of the financial crisis. Many entrepreneurs use equity in their own residences to obtain financing, a source that has become much more difficult to tap.

Some evidence suggests that trade credit can be especially important during financial shocks (see Taketa and Udell 2007). It may be difficult for small companies to expand trade credit to other small companies because they too are being “crunched out.” However, large companies may be able to fill this role because they get their financing primarily from the capital markets, such as commercial paper, and are not dependent on banks. However, problems in the capital markets, including the commercial paper market, may inhibit this safety valve.

How the current credit crunch will play out is unknown. But, the lending technology paradigm offers a useful way to think about how financing for small businesses will be affected.

Banks Try to Escape TARP Trap - Big Surprise?

From MarketWatch:

"Even though the government has stressed it doesn't want to manage big banks' day-to-day operations, a lot of political pressure has been exerted on institutions to get them to lend more. That's made bank investors concerned about potential government lending quotas."

"There's also the fear of the unknown -- that the rules could change,"

"The TARP rules have already changed to some extent."

"Lending decisions partly based on politics, rather than business, would be bad for shareholders"

And this is a surprise why?

FDIC Bill Dodges a New TARP Fight

From the WSJ:

The legislation, introduced late Thursday by Senate Banking Committee Chairman Christopher Dodd, would temporarily allow the FDIC to borrow $500 billion to replenish the fund it uses to guarantee bank deposits, if the Federal Reserve and Treasury Department concur. Those funds would be distinct from the contentious $700 billion financial-sector bailout, which lawmakers are loathe to expand.

The FDIC can presently only borrow $30 billion from Treasury. The bill would permanently raise that level to $100 billion, which the FDIC could tap without prior approval from the Fed and Treasury.

"I do not want [the FDIC] being timid," said Sen. Bob Corker, a Tennessee Republican who is one of the co-sponsors. "I want them to be aggressive, if they feel like a bank needs to be seized, to have the ability to do it."

One difference between the FDIC's insurance fund and the TARP is that any money the FDIC borrows from the Treasury would likely have to be repaid through assessments levied on banks rather than on taxpayers. The FDIC finances its fund through bank fees. Many struggling banks argue that the government should ease up on fees until the credit crisis abates.

Too Big Has Failed

Excerpts from Kansas City Fed President Thomas Hoenig: Too Big has Failed

We have been slow to face up to the fundamental problems in our financial system and reluctant to take decisive action with respect to failing institutions. ... We have been quick to provide liquidity and public capital, but we have not defined a consistent plan and not addressed the basic shortcomings and, in some cases, the insolvent position of these institutions.

We understandably would prefer not to "nationalize" these businesses, but in reacting as we are, we nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.

There are several lessons we can draw from these past experiences.

• First, the losses in the financial system won’t go away – they will only fester and increase while impeding our chances for a recovery.

• Second, we must take a consistent, timely, and specific approach to major institutions and their problems if we are to reduce market uncertainty and bring in private investors and market funding.

• Third, if institutions -- no matter what their size -- have lost market confidence and can’t survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses, and begin the process of restoring them to private ownership.

How should we structure this resolution process? While a number of details would need to be worked out, let me provide a broad outline of how it might be done. First, public authorities would be directed to declare any financial institution insolvent whenever its capital level falls too low to support its ongoing operations and the claims against it, or whenever the market loses confidence in the firm and refuses to provide funding and capital. This directive should be clearly stated and consistently adhered to for all financial institutions that are part of the intermediation process or payments system.

Next, public authorities should use receivership, conservatorship or “bridge bank” powers to take over the failing institution and continue its operations under new management. Following what we have done with banks, a receiver would then take out all or a portion of the bad assets and either sell the remaining operations to one or more sound financial institutions or arrange for the operations to continue on a bridge basis under new management and professional oversight. In the case of larger institutions with complex operations, such bridge operations would need to continue until a plan can be carried out for cleaning up and restructuring the firm and then reprivatizing it. Shareholders would be forced to bear the full risk of the positions they have taken and suffer the resulting losses.

While hardly painless and with much complexity itself, this approach to addressing “too big to fail” strikes me as constructive and as having a proven track record. Moreover, the current path is beset by ad hoc decision making and the potential for much political interference, including efforts to force problem institutions to lend if they accept public funds; operate under other imposed controls; and limit management pay, bonuses and severance. If an institution’s management has failed the test of the marketplace, these managers should be replaced. They should not be given public funds and then micro-managed, as we are now doing under TARP, with a set of political strings attached. Many are now beginning to criticize the idea of public authorities taking over large institutions on the grounds that we would be “nationalizing” our financial system. I believe that this is a misnomer, as we are taking a temporary step that is aimed at cleaning up a limited number of failed institutions and returning them to private ownership as soon as possible. This is something that the banking agencies have done many times before with smaller institutions and, in selected cases, with very large institutions. In many ways, it is also similar to what is typically done in a bankruptcy court, but with an emphasis on ensuring a continuity of services. In contrast, what we have been doing so far is every bit a process that results in a protracted nationalization of “too big to fail” institutions.

Some are now claiming that public authorities do not have the expertise and capacity to take over and run a “too big to fail” institution. They contend that such takeovers would destroy a firm’s inherent value, give talented employees a reason to leave, cause further financial panic and require many years for the restructuring process. We should ask, though, why would anyone assume we are better off leaving an institution under the control of failing managers, dealing with the large volume of “toxic” assets they created and coping with a raft of politically imposed controls that would be placed on their operations? In contrast, a firm resolution process could be placed under the oversight of independent regulatory agencies whenever possible and ideally would be funded through a combination of Treasury and financial industry funds. Furthermore, the experience of the banking agencies in dealing with significant failures indicates that financial regulators are capable of bringing in qualified management and specialized expertise to restore failing institutions to sound health. This rebuilding process thus provides a means of restoring value to an institution, while creating the type of stable environment necessary to maintain and attract talented employees. Regulatory agencies also have a proven track record in handling large volumes of problem assets – a record that helps to ensure that resolutions are handled in a way that best protects public funds. Finally, I would argue that creating a framework that can handle the failure of institutions of any size will restore an important element of market discipline to our financial system, limit moral hazard concerns, and assure the fairness of treatment from the smallest to the largest organizations that that is the hallmark of our economic system.

Delinquencies Continue to Climb in Latest MBA National Delinquency Survey

According to today's press release from the Mortgage Bankers Association (MBA), the delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 7.88 percent of all loans outstanding as of the end of the fourth quarter of 2008, up 89 basis points from the third quarter of 2008, and up 206 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

The delinquency rate breaks the record set last quarter and the quarter-to-quarter jump is the also the largest. The records are based on MBA data dating back to 1972.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 3.30 percent, an increase of 33 basis points from the third quarter of 2008 and 126 basis points from one year ago. The combined percent of loans in foreclosure and at least one payment past due was 11.18 percent on a seasonally adjusted basis and 11.93 percent on a non-seasonally adjusted basis. Both of these numbers are the highest ever recorded in the MBA delinquency survey.

“Subprime ARM loans and prime ARM loans, which include Alt-A and pay option ARMs, continue to dominate the delinquency numbers. Nationwide, 48 percent of subprime ARMs were at least one payment past due and in Florida over 60 percent of subprime ARMs were at least one payment past due.

“We will continue to see, however, a shift away from delinquencies tied to the structure and underwriting quality of loans to mortgage delinquencies caused by job and income losses. For example, the 30-day delinquency rate for subprime ARMs continues to fall and is at its lowest point since the first quarter of 2007. Absent a sudden increase in short-term rates, this trend should continue because the last 2-28 subprime ARMs (fixed payment for two years and adjustable for the next 28 years) were written in the first half of 2007. The problem with initial resets is largely behind us, although the impact of the resets was generally overstated."

Bankruptcy Filings Up In Calendar Year 2008

Bankruptcy filings in the federal courts rose 31 percent in calendar year 2008, according to data released today by the Administrative Office of the U.S. Courts. The number of bankruptcies filed in the twelve-month period ending December 31, 2008, totaled 1,117,771, up from 850,912 bankruptcies filed in CY 2007. Filings have grown since CY 2006 when bankruptcy filings totaled 617,660, in the first full 12-month period after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect. An historic high in the number of bankruptcy filings was seen in calendar year 2005, when over 2 million bankruptcies were filed.