Weak housing market weighs on job growth

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Here we go again...

Fannie Mae and Freddie Mac plunge
July 7, 2008: Shares of the two mortgage financing giants each hit a new 52-week-low after a Lehman Brothers report raised concerns about the need for more capital.

Shares of mortgage financing giants Fannie Mae and Freddie Mac both plummeted Monday after an analyst with Lehman Brothers wrote in a report that the two companies may need to raise billions of dollars if accounting rules are changed. Shares of Fannie Mae (FNM, Fortune 500) fell more than 16% to $15.74. The stock set a new 52-week low of $14.65 earlier during the day. Freddie Mac plunged nearly 18% to $11.91. It also hit a new 52-week low of $10.28 a share before recovering slightly at the end of the trading session. Fannie Mae and Freddie Mac are government sponsored enterprises that help the mortgage market function by purchasing pools of loans and packaging them into securities.

According to a report from Lehman Brothers analyst Bruce Harting, the Financial Accounting Standards Board (FASB) is considering a rule change that would force Fannie and Freddie to move so-called off balance sheet securities onto their balance sheets. The potential accounting change would require Fannie Mae to add $46 billion of capital and Freddie Mac to add $29 billion of capital, Harting noted. Fannie Mae was not immediately available for comment about the Lehman report. Sharon McHale, spokesperson for Freddie Mac, said that Freddie Mac will "not comment on changes in the stock price."

But an accounting rule change would be the latest blow to Fannie and Freddie. With more than a million Americans facing foreclosure and home prices sinking, the two companies have already been hit hard. The two companies, which bought securities backed by risky subprime mortgages when the housing market was booming, have watched those bets unravel in the past few months as the housing market buckled under credit crisis pressures. Fannie Mae has reported a loss for the past two quarters while Freddie Mac has posted three consecutive quarterly losses. Both companies are expected to report a loss in the second quarter as well.

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IndyMac Woes Could Spell Trouble For Regional Banks
July 07, 2008: - For troubled regional banks that need new capital, the stakes are becoming a matter of survival.

On Monday, IndyMac Bancorp Inc. (IMB), a West Coast lender struggling with rising consumer loan delinquencies and fast-depleting cash reserves, said it is under heavy pressure from regulators to shrink its business quickly. The Pasadena, Calif., bank said in a letter to shareholders that it has been unable to find fresh capital from new or current investors, leaving some to wonder whether it could soon become the mortgage crisis' latest casualty. In recent months, dozens of regional banks have followed their large-bank counterparts in raising new capital to offset rising losses from souring loans, and ride out the mortgage crisis. But in contrast to large firms such as Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER) - which have successfully buttressed their loss-riddled balance sheets with tens of billions of dollars from new and willing investors - regional banks have had less luck.

Last week, for example, Zions Bancorp (ZION) disclosed that it raised $45.7 million in preferred stock, well short of the $150 million the Salt Lake City bank originally said it might raise. IndyMac's announcement on Monday could foreshadow the fate that some of those banks will face if they don't find the new capital that they need to continue operating, and avoid regulators' ire. After several quarters of losses, the $32.3 billion thrift came within a whisker of falling short of being well-capitalized in the first quarter, and said in May it was planning to raise capital.

"We have been working with our investment bankers to raise additional capital, " said Michael Perry, IndyMac's chairman and chief executive, in the letter. "To date, we have not been successful with these efforts." The bank warned in May that if it couldn't raise the capital it needed, then regulators were likely to take action. According to Perry's letter, that is exactly what happened. Regulators, Perry wrote, have advised IndyMac "that we are no longer 'well capitalized'" - that is, IndyMac no longer has enough capital to pass regulators' highest muster.

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IndyMac shut down...

Banking regulators close IndyMac
July 11, 2008: The Office of Thrift Supervision shuts down mortgage lender IndyMac and transfers the operations to the Federal Deposit Insurance Corporation.

IndyMac Bank's assets were seized by federal regulators on Friday after succumbing to the pressures of tighter credit, tumbling home prices and rising foreclosures. The Office of Thrift Supervision said it transferred IndyMac's (IMB) operations to the Federal Deposit Insurance Corporation because it did not think the lender could meet its depositors' demands.

IndyMac customers with funds in the bank were limited to taking out money via automated teller machines over the weekend, debit card transactions or checks, regulators said. Other bank services, such as online banking and phone banking were scheduled to be made available on Monday.

The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said. "This institution failed today due to a liquidity crisis," OTS Director John Reich said.

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You're already paying for Fannie and Freddie
July 11, 2008: As rumors of big mortgage companies' collapse swirl, many Americans are unable to find affordable home loans.

The fate of Fannie Mae and Freddie Mac may be hanging in the balance but many mortgage borrowers already find themselves struggling to find affordable loans. Because of the turmoil surrounding Fannie and Freddie, recent borrowers are likely paying nearly 10% more in monthly mortgage payments than they would have. The added cost stems from an erosion in confidence in Fannie and Freddie, according to Mark Zandi, chief economist for Moody's Economy.com.

Fannie and Freddie borrow money in the bond markets to pay for the mortgages they buy from lenders and then sell to hedge funds and other investors. Their cost of borrowing that money has now gone up, and that filters down to lenders who have to charge more to borrowers. "It does have an impact on mortgage interest rates," said Richard DeKaser, chief economist for National City Corp. "It will be more expensive for Fannie and Freddie to acquire mortgages and that will ripple through the market."

And mortgages are not only getting more expensive for ordinary borrowers but they're also harder to obtain as lenders tighten up their standards. "Some lenders are really pulling in their horns," said Steve Habetz, a Connecticut mortgage broker. "They're getting scared. They're demanding really clean loan applications with every i dotted and every t crossed." What is happening now is compounding the damage which has already devastated the housing market.

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Why we shouldn't help Fannie, Freddie...

Saving Fannie & Freddie
Jul 18, 2008 - Why at least one congressman is against bailing out the mortgage giants.

With $5 trillion in mortgage assets, Fannie Mae and Freddie Mac--both government-sponsored enterprises (GSEs)--are dominant players in the home-lending market. But both are also the latest casualties of the subprime-mortgage crisis. Continuing drops in both companies' stock prices last week raised significant concerns over their solvency, prompting the White House, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson to find a way to shore them up. Their solution: to extend Fannie and Freddie's credit and, if needed, to have Congress allow Treasury to buy shares in both companies.

While that was welcome news to many in the mortgage industry, not everyone was pleased. In a closed-door meeting this week, Secretary Paulson met with Republicans on the House Finance Committee, many of whom expressed frustration over writing a blank check to the two institutions with no guarantee or plan in place to ensure they wouldn't need help in the future. Rep. Jeb Hensarling, a Republican on the committee, was among the most vocal objectors, arguing that the deal was far too generous and is ultimately a bad deal for taxpayers. Hensarling spoke to NEWSWEEK's Daniel Stone about why the bailout won't work, why it may set a bad precedent and whether Fannie and Freddie should be broken up into smaller units. Excerpts:

NEWSWEEK: You've been a vocal opponent of bailing out Fannie and Freddie. Why?
Jeb Hensarling: I believe that as of today, Fannie and Freddie are too big to fail. We may help them out today, but we also have an obligation to assure taxpayers that both [lenders] are not too big to fail [in the future]. My fear is that the underlying legislation doesn't address that but makes matters worse. If Fannie and Freddie are in a precarious financial position … why would we increase their loan limits and have them engage in more risky loans? Why would we lower their capital requirements? Why do we need to give a blank check to these two private companies and to prop up their stock prices. Why is Congress making the situation bigger and riskier? These are questions that need to be asked.

More Mortgages: Saving Fannie Mae and Freddie Mac | Newsweek Business | Newsweek.com

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Then why aren't home prices coming down more than they are?...

2.2 million vacant homes for sale
July 24, 2008: Census Bureau report shows percentage of vacant houses available for sale and of Americans who own homes were relatively unchanged in 2nd quarter.

The percentage of vacant homes available for sale remained relatively flat in the second quarter, but still hovered in record territory. Some 2.8% of homes, excluding rental properties, were empty and on the market from April through June, according to Census Bureau figures released Thursday. The vacancy rate hit a record high of 2.9% in the first quarter of 2008. It was 2.6% a year ago.

"They are still not showing a downward trend," said Christian Menegatti, U.S. lead analyst at RGEMonitor.com, an economic research and consulting group. "That's the bad news. The numbers are telling us that prices have to fall more." Just under 2.2 million empty homes were for sale in the most recent quarter. The vacancy rates for homes built in April 2000 or later was 9.8%, more than triple that of houses constructed earlier.

Builders capitalized on the boom in home prices and demand earlier this decade, Menegatti said. Many of those houses now are standing empty. "There was a lot of reckless construction exploiting the fact that prices were going up," he said. "Suburban areas were flooded with new construction in locations that were commuter-unfriendly. Now those are suffering the most."

The South had the highest vacancy rate at 3.2% and the Northeast had the lowest at 1.9%. The West had the largest year-over-year jump, to 2.8% from 2.3%. That doesn't surprise Dean Baker, co-director of the Center for Economic and Policy Research. "The West has been hugely hit by the collapse of the California housing market," Baker said. "That's ground zero of the meltdown."

Owning vs. renting

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Home prices tumblin' down...

Home prices drop record 15.8%
July 29, 2008: The S&P/Case-Shiller Home Price Index of 20 cities fell for the 22nd consecutive month in a row.

May home prices dropped a record 15.8% from a year ago, according to the S&P/Case-Shiller Home Price Index of 20 cities. It was the 22nd consecutive month of decline recorded by the index. Prices fell 0.9% from April to May. Each of the 20 metro areas covered by the index posted annual declines; nine posted record lows and 10 cities recorded double-digit drops.

The Case-Shiller 10-city Index posted a year over year decline of 16.9%, and a 1% month over month dip. Both the 10-City Composite Index and the 20-City Composite Index are reporting record annual declines."Since August 2006, there has not been one month where we have seen overall price increases, as measured by the two Composites," said David Blitzer, Chairman of the Index Committee at Standard & Poor's.

Case-Shiller has been tracking the 20-city index for 19 years, while the 10-city index is 21 years old. The current price decline streak has been unprecedented in both length and depth. Starting in April 1990, the 10-city index streaked down for 10 consecutive months. But that total loss was just 6.5%. Since the 10-city index peaked in July 2006, it has plunged 19.8%. The 20-city is down 18.4%.

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US gets another money shock from IMF
Tuesday 29th July, 2008 - The International Monetary Fund has cast another pall over the U.S. Financial sector.

The IMF’s latest assessment of global financial stability has not been able to give an indication as to when house prices will stop falling in the U.S. The poor prognosis came on the heels of investment bank Merrill Lynch announcing it was reducing its exposure to the U.S. housing market by selling some of its securities.

The securities that Merrill Lynch bought for nearly US$31 billion will be sold for just under US$7 billion. Meanwhile next year’s incoming U.S. president will inherit a budget shortfall for 2009 of US$482 billion. The shortfall could go even higher if home loan mortgage banks Freddie Mac and Fannie Mae approach the U.S. government for more money.

Last week a law was adopted making the way clear for emergency credit for both organizations. Any projected funding for Freddie Mac and Fannie Mae has not been built in to the IMF projected shortfall. The cost of the wars in Iraq and Afghanistan have also not been counted.

US gets another money shock from IMF

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Falling home market hurts Freddie...

Freddie's risks all too plain to see
August 6, 2008: Investors blanch at the mortgage giant's effort to reveal the risks it bears as house prices tumble.

Mortgage giant Freddie Mac says it's intent on providing a clearer view of its risks. But so far, there's little sign that investors like what they see. On Wednesday, CEO Richard Syron said the big government-sponsored mortgage company would offer "significantly more information about our credit position." Freddie said the numbers should give investors confidence that the company has adequately reserved for future credit losses. Handily, the figures also give analysts and investors "an erector set" for building their own loss-expectation models. With house prices falling faster than the company expected, and credit quality accordingly deteriorating more rapidly, Freddie seeks to offer "absolute complete transparency," Syron said.

But as has been the case for more than a year now, the problems confronting investors in Freddie and other financial stocks remain all too easy to see. First, losses on existing loans are rising, sharply in some cases - particularly in the Alt-A category that comprises loans to borrowers with better-than-subprime credit scores but without full documentation. Second, though Freddie said Wednesday that it has increased its forecast for U.S. house-price declines, the company also acknowledged it's impossible for anyone to know how much worse the housing market will get.

Syron's comments come after Freddie posted a wider-than-expected $821 million second-quarter loss, following the latest multibillion-dollar addition to its reserves for credit losses. Freddie shares, whose plunge last month to a 17-year low prompted the government to prepare for a possible taxpayer bailout of the company and its sibling Fannie Mae (FNM, Fortune 500), tumbled 16% in afternoon trading.

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The next mortgage crisis on the horizon...

The Next Mortgage Crisis? Alt-A Borrowers See Red
Aug. 8, 2008 : Good Credit Is Not Enough for Many Alt-A Holders

The subprime mortgage mess has dealt a blow to families across the nation, but now a new mortgage disaster is percolating that's striking those with good credit and good jobs -- people who took out mortgages known as "Alternative A" loans. "Either I walk away or I try and make this work," said Linda Minnifield, a northern California resident who is now struggling with her Alternative A loan. Also known as "Alt A" loans, these mortgages are offered to people who fall in the middle of the spectrum of home-loan borrowers. On one end, there are subprime borrowers who have poor credit and qualify only for loans with high interest rates. On the other end, there are prime borrowers with good credit and steady income who qualify for loans with the lowest rates.

Like prime borrowers, Alt-A loans go to people with good credit. But in many cases they've received loans where they didn't have to document income or assets – in other words, to show the bank that they definitely have the income to afford their payments. To compensate, banks can charge Alt-A borrowers higher interest rates than prime borrowers. But, thanks to their good credit, the borrowers still pay lower rates than their subprime counterparts. These days, however, Alt-A borrowers are defaulting faster and faster. The number of Alt-A loans in which payments are 60 days late has quadrupled from a year ago to nearly 13 percent, according to the mortgage research company LoanPerformance, a unit of First American CoreLogic.

Many homeowners in trouble have option-ARMs -- adjustable-rate mortgages where the home borrower can choose usually one of four types of payments to make each month. That amount could range from the actual principle and interest due or it could be a minimum payment, often significantly less than even the interest owed. The difference between what is actually due and what the borrower pays is added to the total amount until the loan climbs to a level when the bank will no longer allow the homeowner to choose how much to pay.

More ABC News: The Next Mortgage Crisis? 'Alt-A' Woes

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Economy Creates 'Upper-Class Homeless'
Aug. 8, 2008 - Poor Economy Contributing to Upper-Class Homelessness

Craig Miller left Florida this year with $3,000, a borrowed RV and a dream of helping people find meaning in their lives. His savings may have struck some as a considerable sum. But for a family of four on their way to California, it wasn't even close to adequate. The family, once intent on selling the RV for the owner, now lives in it. They rise early and drive to the beach for breakfast before Miller drops off his wife at her new job and heads to the library where the kids can play and read while he tries to rebuild his business. After he picks up his wife, they head out again, sometimes back to the beach for dinner before ending at the Santa Barbara, Calif., parking lot where they sleep for the night.

"You think you have everything," Miller said, "but you can lose income tomorrow." Miller once had a four-bedroom home, complete with pool and spa, when he lived in Orlando and worked as a life coach and ran his business. He's now part of what appears to growing number of Americans who have been forced out of their comfortable lives and into their vehicles by the continuing foreclosure crisis and slumping economy. They're the upper-class homeless, the middle-class homeless or the new homeless, depending on whom you talk to.

Michael Stoops, executive director of the National Coalition for the Homeless, said this group of people is different from what is considered the typical image of homelessness. They are generally middle-aged, have good educations, own their own vehicles and once lived comfortable and self-sufficient lives. Sometimes they still have jobs, cell phones, laptops -- just no place to crawl into bed.

"This is a way for people to cling on to a part of the life they once had," Stoops said. "And having a vehicle makes life easier." Stoops can't say for sure how many of the upper-class homeless are living in their vehicles across the country. But his group's April 2008 survey of state and local homeless coalitions found that 61 percent of respondents reported an increase in homelessness since the foreclosure crisis began last year.

Two Foreclosures in Two Months

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Housing becoming a losing investment...

25% of home sales result in loss
August 13, 2008: Values have fallen so far in many cities that sale prices don't cover what sellers originally paid. That means more hard times before markets recover.

More homeowners than ever are selling at a loss, propelling the real estate market deeper into crisis. In the 12 months that ended June 30, nearly 25% of all homes sold nationwide fetched less than sellers originally paid, according to real estate Web site Zillow.com. While the nation's double-digit decline in home prices has been well documented, the new report underscores the economic force of those price declines. Homeowners are walking away with much less in their pocket when they sell. And that affects more than the real estate market.

"It's stunning what's happening out there," said Stan Humphries, Zillow's vice president of data and analytics, who looked at statistics that date back to 1996. "The numbers are the worst we've seen and it's not just the magnitude of the problem but the scope - so many markets are affected." In Merced, Calif., 63% of homes sold during the past 12 months brought in less than what the owner paid. Prices there have fallen 40% over the past 12 months and 56% from their 2006 peak. About 63% of sellers in Stockton, Calif., lost money during the same period, 60% in Modesto, Calif., 55% in Las Vegas and 38% in Phoenix.

And the trend has worsened in recent months. In Merced, 74.9% of sellers took a loss when they sold during the three months ended June 30 compared with just 28.7% during the same period in 2007. The experience of one would-be seller in Cape Coral, Fla., illustrates the kinds of losses sellers are suffering. The homeowner, who asked not to be named, paid $147,000 in 2003 for a three-bed, two-bath ranch. Prices have dropped there more than 22% in the past 12 months. He said he made a 10% downpayment and spent big on upgrades, including two renovated baths. The house was appraised at $279,000 two years ago. Two months ago: $140,000. He has been trying to sell it for more than a year and has dropped the price to $129,900. "It's terrible," he said. "I'm taking a major loss. I'll probably have to bring a check to the closing."

The short-sale solution

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The next wave of defaults...

'Liar loans' threaten to prolong mortgage mess
Mon., Aug. 18, 2008 - Mortgages allowed without proof of pay, assets default in record numbers

In the mortgage industry, they are called "liar loans" — mortgages approved without requiring proof of the borrower's income or assets. The worst of them earn the nickname "ninja loans," short for "no income, no job, and (no) assets." The nation's struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.

"Those loans are going to perform very badly," said Thomas Lawler, a Virginia housing economist. "They're heavily concentrated in states where home prices are plummeting" such as California, Florida, Nevada and Arizona. Many homeowners with liar loans are stuck. They can't refinance because housing prices in those markets have nose-dived, and lenders are now demanding full documentation of income and assets. Losses on liar loans could total $100 billion, according to Moody's Economy.com. That's on top of the $400 billion in expected losses from subprime loans.

Fannie Mae and Freddie Mac, the nation's largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from sour liar loans, which are officially called Alternative-A loans (Alt-A for short) because they are seen as a step below A-credit, or prime, borrowers. Many of the lenders that specialized in such loans are now defunct — banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More lenders may follow.

More 'Liar loans' threaten to prolong mortgage mess - Mortgage Mess - MSNBC.com

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Large U.S. bank collapse seen ahead
Tue Aug 19, 2008 - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference. "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis. "Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

Rogoff's comments come as investors dumped shares of the largest U.S. home funding companies Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans. A government move to recapitalize the two companies by injecting funds could wipe out existing common stock holders, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

More http://www.reuters.com/article/wtMos...21695020080819

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Turnaround or false rebound?...

Job boom could be coming soon
August 21, 2008: Economists at the University of Michigan predict that 3.5 million jobs will be created in the next two years.

There is no denying that the job market is weak. The Department of Labor reported this morning that 432,000 people filed for unemployment benefits in the past week - making this the fifth straight week that jobless claims topped the 400,000 mark. And so far this year, there has been a loss of 463,000 jobs.

Yet, some are starting to see light at the end of the tunnel on the job front. Economists at the University of Michigan said in a report released yesterday that 900,000 jobs will be added next year and that 2.6 million more will be created in 2010. Joan Crary, an economist with the University of Michigan, said that this forecast is based on a belief that the economy will finally begin to rebound in the second half of 2009.

Housing, autos may recover

She added that the increase in jobs will likely be broad-based. But two particularly hard-hit sectors of the market could help lead the comeback. "To get this sort of recovery, you'll have to have a turnaround in housing. So you'll have to see a pickup in construction jobs. We could also get a pickup in vehicle manufacturing with the shift to smaller cars," she said. Crary added that as long as oil prices remain relatively high, she expects more companies to aggressively invest in other energy sources, such as solar power, wind power and ethanol.

"Alternative fuel could be an area where there will be a lot of research and development going forward, so we could see some job gains in that industry," she said. Still, the job market is not likely to improve in the next few months. The University of Michigan is predicting that a total of 700,000 jobs will be lost in 2008. That implies an average loss of more than 47,000 a month for the final five months of the year. And some think that forecast is too optimistic.

Doubts persist