The Housing Bubble

Yikes…there’s frost on the pumpkin this morning and the scent of Gloria Jean’s coffee beans in the air.

I woke up at 6:00am and went out only to discover that House Of Bagels in Sunnyvale doesn’t open ’til 7:00am. But it did feel like fall outside.

I’m leaving for Beijing on Wednesday. I’ll try to see of there are empty condos, like the ones I saw in Dublin last month, over there. With 1.2 Billion people, it would be harder for them to overbuild…

Time for an “uncommon economic indicators” thread today. It is something that New York’s public radio station does sometimes. I’ll go first.

Three juicy articles from the AZ Republic on the state of the housing market in Phoenix, for your Sunday morning reading enjoyment. The third article, carrying the headline “Plummeting prices have rendered condos nearly worthless” is my personal favorite.

http://www.azcentral.com/business/realestate/articles/2009/10/11/20091011biz-vhv-main1011.html

http://www.azcentral.com/business/realestate/articles/2009/10/11/20091011regroup-landlord-REV.html

http://www.azcentral.com/business/realestate/articles/2009/10/09/20091009biz-condos1010.html

Now for some anti-homeownership news….

By TERI KARUSH ROGERS - NYT
October 9, 2009

AS many co-op and condo owners can attest, ownership has its drawbacks.

These include the intermittent misery of dealing with a board and the waking nightmare of serving on one. There are also the occasional hair-raising assessments for improvements to the building, on top of the expense of maintaining an apartment.

Indeed, in the absence of a rising market to ease the pain of having property, owners might be excused for wondering what it would feel like to surrender the keys and become a renter again.

Would it be a relief — or an unnerving loss of control? A comedown, or, in the aftermath of the housing debacle, a fashionable, politically correct choice? Moving from owning to renting seems to teach some people that they just weren’t meant to be renters, while others find it liberating.

“I love it,” said Kim Lipstein, 38, who unshackled herself from her Upper East Side co-op last spring. “I feel the weight of the world is off my shoulders.”

Ms. Lipstein and her husband, Evan, 46, waved goodbye to the 850-square-foot two-bedroom one-bath apartment they shared with their children, Samantha, 7, and Jayda, 5, after their plans to combine it with another unit fell apart.

Working with Wendy Jodel, a vice president at Citi Habitats, they sought to buy something larger. But they walked away from an accepted offer on a 1,400-square-foot two-bedroom because the maintenance was too high, the reserves too low, and their younger daughter would have been wait-listed for the nearest public kindergarten.

Given lenders’ propensity to set modified payments at levels where 55 percent of modified loans eventually go into default, wouldn’t it be wiser for most home debtors facing foreclosure to just walk away, avoiding the modification process entirely?

And I agree with Mark Goldman’s opinion on what the real question is.

Foreclosure lifeboat facing uncertainty about future
By Dean Calbreath
Union-Tribune Staff Writer

2:00 a.m. October 11, 2009
Photo of Dean Calbreath
Call Dean at 619-293-1891

To any San Diegan who’s struggling to pay the mortgage on an “underwater” home, it will probably come as no surprise that the government last week determined that its program to keep homeowners out of foreclosure may be far too small to face the increasing wave of defaults.
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In San Diego County, the number of homes going into foreclosure slid from 8,473 during the first half of 2008 to 6,591 during the same period of this year. Local mortgage agents say that’s at least partly as a result of state and federal modification programs as well as a state-imposed moratorium that postponed a specific class of foreclosures for 90 days.

During the same period, the number of defaults continued to rise, climbing from 18,494 to 19,977, suggesting that there could be further rises in foreclosures in the future if the modification programs run out of steam, especially if the jobless rate continues to bounce around the 10 percent rate or higher.
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(Mortgage broker Mark) Goldman said that some data show that up to 55 percent of borrowers go back into default even after their loans are modified.

“When I read those statistics, I ask myself, ‘What were the terms on that modification to begin with? Was it really enough to keep the borrower out of foreclosure?’ ” he said. “If we’re going to really modify the loan, you want to make sure it’s modified enough so that you’re not just postponing a default.”

Goldman said that in general a mortgage modification that allows a borrower to make affordable payments is less costly to a lender than when it forecloses on a house and sells it for a loss.

But Goldman added that because mortgages have been packaged and sold to investors, the investors bear the brunt of the foreclosure costs, while the lenders still can make money by keeping the monthly mortgage payments relatively high, even if they eventually end in default.

“A lot of investors are getting pretty dissatisfied with that,” he said.

So even if the Treasury Department does try to sweeten the pot even further for the lenders, by pumping more money into HAMP, it’s questionable what the ultimate effect is going to be. The real question, Goldman said, is what will happen after the federal trough dries up and once the Federal Reserve stops buying the mortgage-backed securities.

The consequences of blatant financial engineering to prop up housing prices should not be attributed to psychology. Also, never attribute to bubble thinking what can be attributed to blatant ignorance.

The New York Times
Economic View
A Bounce? Indeed. A Boom? Not Yet.

By ROBERT J. SHILLER
Published: October 10, 2009

THE sudden rise in home prices suggests that the psychology of the market has shifted substantially. But what should we expect in the months ahead? Not necessarily that we’re entering a new housing boom. To a large extent, where we’re heading depends on what home buyers are thinking.
…
We looked at both the long- and short-term attitudes of home buyers. In our survey, we ask, “On average over the next 10 years, how much do you expect the value of your property to change each year?” The average answer among 311 respondents in 2009 was an increase of 11.2 percent. The median response — with half above, half below — was 5 percent, also high. That sounds rather like bubble thinking.

For a home buyer who borrows 90 percent of the money to acquire a house, an appreciation rate of 11.2 percent offers an investment bonanza. By putting a small amount of money down, investors stand to make a large gain if home prices climb. That is the power of leveraging. Recently, however, home buyers have also experienced the unpleasant consequences of leverage when home prices fall. Investing in a home during the wild past few years has been like gambling in a casino: You can leave with riches or empty pockets.

In our survey data from one year earlier, when prices were falling at an annual rate of nearly 20 percent, buyers were still expressing long-term optimism. Then, the average answer to the question about expected yearly increases in home values was 9.5 percent a year, with a median of 5 percent — high figures indeed for that time. The bubble thinking is not new.
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I’ve been wondering lately what is going to happen to Social Security and Medicare. I am only 25 years old, and I know I will probably not receive my money back when it’s time for me to retire. The baby boomers are sucking the money out of the accounts and will soon be bankrupt. In some articles, I’ve read SS and MC will take the entire revenue of the government by 2015 or something like that.
What will happen to people that have contributed for years, but will not see their money? Will they sue the government? Will the government reduce benefits and increase taxes? What do you guys think?
I honestly wish the government stopped taking my money every month and allow me to explore alternative methods to secure my retirement; instead they force everybody to go through inefficient government programs.

On going debate with measton…

@James
The wealth stripping by insurance companies hurts the ability of the US to compete given that employers…

@Measton. Agree here. Would be easier if business dumped cost on taxpayers. Which is the reverse of this policy unless you plan to tax business and that might not work out well.

@James said
“My numbers are an estimate and I suspect they are very close to correct.”
James these numbers are then meaningless unless you can back them up. estimates based on ??????

@Measton; The original paragraph based this on wiki page talking about this number. If you work through the numbers you end up at around 5% of the population or less.

@James said
“Comparisons on cost per country don’t impress me at all. The quality of care “overall” is very different”
You didn’t read the rest of what I posted. Not only is cost less but health outcomes are equal or better according to WHO and other international groups. Of course I know you hate all of these groups and will immediately discount their data.

@measton: went back and looked over the links you sent about other countries and their healthcare plans. GB mentioned “problems” on the queue’s. Japan/Germany systems going deeper in the red. Plenty of good stuff there. Some of which could be used here without any legislation.

@James said
“I believe organizations like the CBO are filled with liberals. It tends to be that exact group of people involved in that field and on that kind of study” Again james you seem to value your opinion over evidence. Where is the evidence?? I suspect that when ever anyone presents data that conflicts with your pre conceived notions that you immediately lable them a liberal. Again Congresss was controlled by republicans in 2005 james.

@measton: Yeah. You ever go to a liberal arts college? Not a bastion of conservative though. Congress was R but that organization wasn’t revamped in a mere decade. I said there is a bias.

@JAmess
“Possibly the government would spend less on the insurance part. However, they might easily not fight for pricing on various kinds of care or do a good job locating fraud in the system. The problem is the government has zero urge to control costs. It is OPM.”

You would be much more effective in making your case if you relied less on your opinion and more on gathering evidence.

@Measton: personal data point was going to UCLA Harbor Intensive Care. Got a very large bill and insurance negotiated it down. However, still was too high. Worked with hospital and they said “Oh those are the prices we charge the government”. On a plus note I survived.

@James
“I suppose the goal of many of the libs around here is to be like France.” And there it is, never mind that there are better more efficient systems of administering health care that would improve lives and improve our countries ability to compete we can’t do it if the French did it. Back to Freedom Fries dam it.

@Measton: A lot of my liberal friends are also francophiles. I looked over the links you sent. Executive summaries that also have mention of trade offs in the systems. Germany lets the top 10% opt out. France wasn’t mention probably because of the large percentage of unemployment. It wasn’t like the information there said “oh this is a slam dunk”. Again, I hate looking at executive summaries.

@James
“About the being sick for more than 18 months. Can understand from a business perspective completely. It stinks but the insurance needs to have some cut off point or a few people can drag down the whole system. ”

It’s called insurance, people buy it to make sure they don’t have a financial disaster when they get sick. Now you would think that if they kept making their payments they should continue to get the insurance they paid for. Instead the very profitable insurance companies roll them onto the tax payer dime. ie you are now paying for their health care James.

@Measton: I realize that. At some point the discussion is do we keep paying this? What price should we pay?

@James
“Again. It. sucks. However, other than some communist system, what could you possibly do?”

Medicare/VA system that pays only for things that meet a certain cost benefit analysis and then if you want more you pay cash or get private insurance. A much more rational system. A much more efficient system.

@Measton: Again, it sucks. At some point you realize the economic effort spent at saving one person isn’t worth it. Not easy to put a number on that. Insurance business guys do it in a cold calculation. I don’t expect the government to be able to handle a blank check.

Part of the point of what I posted is insurance reform and public option for the remaining 5% are a separate issue. Doesn’t need to be contentious omnibus legislation. You hate their is a profit motive? Fine. Not much to discuss because your only answer is how to institute a socialist medical system.

And again, if you’re all fired up and motivated. Go get mike moore and company to get hospitals to form a giant non-profit/insurance/hospital alliance group. See how it works out.

Again, we complain about how the government works with the Fed/big banks/socialism for the rich. It will probably be just as much fun with the government.

Geez, all of us productive members of society have been bested by the 6pct’ers this afternoon at Panera. I’m rolling unplugged — better get typing!

I haven’t seen a lot of discussion of reverse mortgages here; this Seattle Times article suggests they may be another shoe to drop:

http://seattletimes.nwsource.com/html/realestate/2010034089_realreversemortgages11.html

I found the part about FHA sticking it to seniors to close their insurance fund gap particularly interest…

———————

Reverse mortgages may be the next subprime crisis, according to the National Consumer Law Center (NCLC).

[...]
Seniors who take out reverse mortgages after Oct. 1 through the FHA’s program, also known as a Home Equity Conversion Mortgage, will receive 10 percent less than they would have before Oct. 1, according to Bell. The change is to compensate for an estimated $798 million deficit from depressed home prices, Bell said.

[...]
“While reverse mortgages can provide real benefit, they also have some of the same characteristics as the riskiest types of subprime mortgages — and that should set off alarm bells,” Dugan said.

Has anyone else noticed a conspicuous lack of holiday decorations yet?

I have some upbeat news to share. I am now gainfully employed! Took me 4.5 months here in Silicon Valley with its 12% and above unemployment, but I did it!

Interviewed last Tuesday, offer made on Friday morning, start tomorrow.

Just to give hope to all of you currently on unemployment, I’m in my 50s and still got a job that’s paying me what I made before with plenty of stock options for when the company goes public. I know that offer could be rare in this economy but it did happen.

When I mentioned to one recruiter about losing my previous job in a merger to the other peer, the comment was made “oh, they were a lot younger than you I take it”. So I truly began to think that my age would preclude me from getting a good paying job. It didn’t.

So don’t despair. I wish you all the best of luck and do stay positive.

I see the entitlement mentality is alive and well.

On the House: To modify mortgage: Persist!
By Al Heavens

Inquirer Real Estate Columnist

Theodore Frimet of Croydon describes himself as an “unemployed clerk trying to save his home.”
After several months of working on his own with his lender to modify his mortgage, he even has had “a vision of success.”

It’s not that Frimet hasn’t hit potholes in what, for just about everyone, is a long road toward modification. He believes, however, that delays are not totally the fault of the servicers. Instead, he says, “it is [the U.S.] Treasury that has underestimated the volume of work required by lenders to process Treasury guidelines.”

Experts and consumers seem to agree that efforts to reduce foreclosures by refinancing loans or modifying mortgage terms to a debt-to-income ratio of 31 percent are not working as well as they might.

At a recent Philadelphia hearing to gauge the effectiveness of the government’s Home Affordable Modification Program (HAMP), even officials from Treasury, Fannie Mae and Freddie Mac who oversee it gave the program a “C” average.

John Dodds of the Philadelphia Unemployment Project agrees, saying the “program has deficiencies that make it ineffective for large numbers of the unemployed, as well as structural problems that were alluded to in the testimony” at the hearing.

Here’s what Frimet has discovered about the process:

Lenders first tell you that things will take 30 to 45 days, but when pressed they’ll acknowledge it’s more like 90.

Servicers’ support staff aren’t calculating debt-to-income ratios properly.

Treasury has provided guidelines only, which Frimet doesn’t believe are binding on any servicer.

He thinks many borrowers create “self-imposed” delays because they don’t know what they are doing. Many don’t have a clue about budgeting, or even how they got into trouble.

“Perhaps many applicants lack the skills to produce required financial data, and to communicate effectively” when information is incorrect, Frimet says.

For example, a homeowners’ association fee was incorrectly added to his application. The matter was cleared up quickly.

Confusion over debt-to-income ratio - HAMP’s goal is to get the mortgage payment down to not less than 31 percent of the borrower’s monthly gross income - is more problematic, he says.

“My lender did not apply all of my mortgage loans into the debt-to-income calculation,” Frimet says, adding that “they were not responsible for any mortgage other than [theirs].” So he had to keep repeating “that to calculate a DTI, you combine all mortgage debt, and compare it to all income.”

“In all fairness to my mortgage lender, I was able [on a few occasions] to speak to other service processors that were more well-versed in Treasury’s guidelines and were open to rational reasoning,” he says.

Frimet presumes that many rejected applications stem from incorrectly calculated debt-to-income ratios.

His advice to homeowners: Don’t give up.

“They need to call their lender again, and challenge the lender dogma,” he says.

Who else has some good news today? (hold the sarcasm, please). Who found a good job, extra income, solved a problem, enjoyed time with a loved one, has a kid who is doing well, etc?

Anyone? Anyone?

PB, you have been a long-time blogger, and I value your opinion… I really have to crunch over the next few weeks to finished my masters program, but I’d love to continue our conversation in early December. I know that’s planning ahead a little, but since you got your life insurance policy approved, I think it’s doable :grin:What I want to discuss is randomness, acceptance, and power. One of the things that constantly comes up from my colleagues is my ability say “crazy things.” The thing is, I don’t see any of it as crazy — meanwhile I keep getting promoted to new leadership positions and offered new challenges. What sets me apart is my willingness to articulate the truth to anyone willing to listen. In short, I’ve been practicing HBB ruminations/gospel in the real world setting.

My point is that people like Taleb and Gladwell become masters of their universe by acknowledging what they know and what they don’t know. Like me, they get ascribed power by simply “letting go.”
They even recognize that it is luck (Taleb), but also not luck (Gladwell would point to Taleb’s background as being factors for success beyond control, which Taleb would dismiss either way).

Anyway, my question to you is the one I have always asked of combo and others: how do you personally harness all of that and make a difference? It would be counter intuitive, and maybe even dangerous (certainly HBB blasphemy), to assume like Gladwell that we really aren’t truly responsible for our own fate (the nature of bad loans, HELLO! Nobody made you sign it), but then we have some good evidence that it’s all dumb luck. But then why am I always falling into leadership positions?

Since I’ve been gone for awhile, here’s my share of good news:

Wife & I (& kids) are all healthy (thanks, probiotics!)
I started my welding class and am getting better.
I designed, built, and stained a 4′x6′ platform with stairs and wheelchair ramp off the deck that actually looks good.
We gained a new client family (more income).
Weather has been Indian Summer tee-rific.
The rancher took all the cows away.
I’ve got another Michael Connelly book that’s a great read.

Have a good weekend evabody . . . .

Given that Austria is so far inland, are its economists freshwater by definition?

Humbling year for bickering economists

By Alan Beattie in London

Published: October 11 2009 18:00 | Last updated: October 11 2009 18:00

These are dismal times for the dismal science, or so the complaint goes. The main charge is that economics failed to predict the financial crisis and has few ideas about how to prevent a repetition.

On Monday, the annual Nobel prize for economics is awarded (not technically a Nobel, in fact, but let that pass), and with it a prominent plinth of credibility from which to preach to the world. Given the state of the discipline, should the Nobel be awarded at all?
…
In recent months, denizens of the econoblogosphere have been watching with increasing amusement, or alarm, an exchange of invective between Paul Krugman (officially known as “the Nobel prize-winning Paul Krugman”) of Princeton and the New York Times, and John Cochrane of the University of Chicago. Each is a representative agent of two schools. The first, a more Keynesian approach with overarching macroeconomic analysis, tends to scepticism about the efficiency of markets and is currently calling for government spending to help the world pull out of recession. The second, whose macroeconomic conclusions are more closely rooted in microeconomics, places greater trust in markets and is sceptical of active fiscal policy.

Broadly speaking, they are respectively known as “saltwater” and “freshwater” economists after the preponderance of the first in the US’s coastal academies – Harvard, Princeton, Berkeley – and the latter in universities close to the Great Lakes – Chicago, Minnesota, Carnegie-Mellon.

Prof Krugman’s initial broadside accused the Chicago school of reflecting “a Dark Age of macroeconomics in which hard-won knowledge has been forgotten”. Prof Cochrane’s counterblast compared Prof Krugman to a scientist denying that HIV causes Aids or calling global warming a myth.

Amusingly, the front-runner for Monday’s prize is Chicago’s Eugene Fama, one of the freshest of the freshwater crowd. His work helped to popularise the “efficient-market hypothesis”, which, broadly speaking, holds that asset prices in financial markets reflect all available information. That thesis has come under intense fire as a result of the financial crisis, and a Nobel for Prof Fama would no doubt stoke the controversy further and turn his exchange with Prof Krugman into a battle of the laureates.
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Economics cannot hope definitively to decide large swathes of the subject, certainly not at this stage. The subject is blindingly complex, as well as relatively young, and much of the data incomplete and unreliable.

Insisting that economics is a hard science seems to feed the virulence of disagreement, since opponents can be portrayed as not just mistaken but actually illegitimate. For what it’s worth, I’m on the saltwater side when it comes to economic theory and to current policy recommendations. But I’m willing to accept I might conceivably be wrong.

It is not oblivion that economics needs: it is a dose of humility. And anyone that says otherwise is an idiot.

What is the most important reason for those who recently lost their castles to rebuild their damaged credit?

To prepare for purchasing their next castle, of course…

Housing Scene
Take steps right now to rebuild your credit
By Lew Sichelman

2:00 a.m. October 11, 2009

WASHINGTON — The ideal of homeownership may have lost its attraction to the millions of underwater owners who have lost their castles during the housing meltdown. But it is never too soon for folks who have given up their homes to start pointing to the day when they will once again take the plunge.

Whether you were able to persuade your lender to accept a payoff for less than what you owed and dump your albatross in what’s known as a “short sale” or lost everything to foreclosure, if you start rebuilding your credit now, you may be able to buy another place in as little as two years.
…

All you sci-fi fans, Hallmark has come out with Robbie the Robot ornament from the movie Forbidden Planet. Press a button and Robbie speaks. Pretty cool. I bought one for my sci-fi collection.

Texas Music Matters replayed an episode tonight that’s a retrospective of Roy Orbison’s career. It’s a very enjoyable hour of radio.

after the slashes: texasmusicmatters.kut.org/?s=roy+orbison

So this is a strong dollar policy? This makes me quite curious about what a weak dollar policy might look like.

Thoughts?

* The Wall Street Journal
* FOREIGN EXCHANGE
* OCTOBER 12, 2009

Dollar’s Slide Poised to Continue
U.S. Quietly Tolerates Drop, While Trade Partners Fret; a Long List of Negatives for the Currency

By PAUL EVANS and ROBERT FLINT

The dollar is likely to continue to decline this week, reflecting the appetite for non-U.S. assets and signs of apparent official resignation at the dollar’s decline.

Faith in an economic recovery has reduced the dollar’s safe-haven appeal, while global interest-rate dynamics have fostered its use as a funding currency for riskier investments.

The lukewarm lip-service paid to the dollar’s decline in recent statements by some international monetary officials doesn’t pose much of an obstacle to the U.S. currency’s slide, either. Moreover, if companies continue to report encouraging results in the slew of corporate earnings reports on tap this week, the euro and other higher-yielding currencies should gain ground.

Given the list of negatives, currency strategists at Barclays Capital said that “it is surprising that the dollar is not even weaker.”

Against this background, analysts expect the euro to trade between $1.47 and $1.50 this week, while the U.S. currency fluctuates between 87.50 yen and 91 yen.

Late Friday in New York, the euro was at $1.4709 from $1.4780 late Thursday. The dollar was at 89.78 yen from 88.48 yen Thursday. The euro was at 132.06 yen from 130.77. The U.K. pound was at $1.5846 from $1.6073 and the dollar was at 1.0326 Swiss francs from 1.0269.

The dollar got a respite Friday, rising against the euro and yen as investors took profits and adjusted positions ahead of the long weekend because of holidays Monday in the U.S., Canada and Japan. However, the rally isn’t expected to last.

“We still have trouble finding U.S. dollar positives in this market,” Barclays strategists said, adding that they “expect broad dollar weakness” in the coming week as the Federal Reserve’s dovish policy stance increasingly contrasts with a small, but growing, list of central banks where interest-rate increases are real possibilities.
…

The Fed
Oct. 11, 2009, 7:20 p.m. EDT
Fed’s Bullard warns on inflation, unemployment
By MarketWatch

LOS ANGELES (MarketWatch) — Federal Reserve Bank of St. Louis President James Bullard said Sunday that unemployment is headed into double digits, while the medium-term inflation outlook poses more risk than generally believed, according to reported comments.

“Unemployment is leveling off, but we still may be headed toward double digits,” Bullard was quoted as saying in a Bloomberg report.

According to data released earlier this month, the U.S. unemployment rate hit a 26-year high of 9.8% in September. See full story on September jobs report.

Bullard also voiced concern that popular perceptions ignore the risk of high inflation.

“I am concerned about a popular narrative in use today … that the output gap must be large since the recession is so severe … [and] any medium-term inflation threat is negligible, even in the face of extraordinarily accommodative monetary policy. I think this narrative overplays the output-gap story,” he was quoted as saying by Dow Jones Newswires.
…

Houses are not the only commodity in oversupply at the moment…

The Financial Times
Recovery for base metal prices falters
By Chris Flood in London
Published: October 11 2009 19:09 | Last updated: October 11 2009 19:09

The rally in base metal prices this year has stalled in recent weeks as concerns mount over whether consumption in the developed world will pick up enough to offset any short-term weakening in Chinese demand.

LME base metalsBase metal prices on average have risen 72.8 per cent since the start of the year, according to the London Metal Exchange.

However, copper, aluminium, nickel, lead and tin prices have either fallen or remained rangebound since the start of August. Only zinc has managed to make further gains.

The pause comes in spite of weakness in the dollar, which has pushed gold to an all-time high and supported other commodities.

Commodities typically tend to benefit from a weaker dollar because it makes them more affordable to non-US consumers.

“We must not be fooled into thinking that the gains we have seen [since January] are a natural precursor to even better prices ahead,” said Nick Moore, a commodity strategist at the Royal Bank of Scotland, as traders, analysts, merchants and mining executives gather today for this year’s LME week.

Mr Moore pointed out that there were still “massive” supply surpluses and “huge inventory mountains” to be eroded.
…

Here’s a good video that explains the mortgage crisis: http:www.vimeo.com/3261363

Why would anyone be surprised if bank earnings turn out sucky in the worst financial crisis since the 1930s? And why would anyone expect the banks to be a lot healthier in 2010-2011, given that they still hold a boatload of toxic assets, and that a commercial real estate crisis is percolating?

Earnings Outlook

Oct. 10, 2009, 1:29 p.m. EDT
October surprise from bank earnings?
Some experts worry results may be much more negative than investors expect
By Alistair Barr, MarketWatch

SAN FRANCISCO (MarketWatch) — Bank stocks surged during the third quarter, but as companies prepare to report results from the period, several industry experts remain concerned.

“We are very early on in this credit cycle,” Timothy Long, chief national bank examiner at the Office of the Comptroller of the Currency, said at a recent conference.

“That statement caught everyone by surprise,” said Nancy Bush, a veteran bank analyst who attended the conference.

J.P. Morgan Chase kicks off the bank-reporting season on Wednesday.

The KBW Bank Index, which tracks shares of lenders, including Bank of America, Citigroup and Chase, jumped 30% in the third quarter, as investors bet that huge increases in bad loans from the mortgage meltdown and broader financial crisis were easing.

Thinking the worst is behind the industry, investors began looking to 2010 and 2011 when banks should be a lot healthier, according to Richard Bove, an analyst at Rochdale Securities. Third-quarter results will make that leap of faith harder to maintain, he said.

“Third-quarter earnings for most banks, particularly the regional lenders, will be extraordinarily negative,” Bove said.
…