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Thursday, May 22, 2008

Housing/Subprime/Credit Roundup — May 22, 2008

Items of Interest:

MarketWatch:
U.S. home prices down 1.7% in first quarter: OFHEO -- U.S. home prices fell a seasonally adjusted 1.7% in the first three months of 2008 -- the largest quarterly price decline on record, the Office of Federal Housing Enterprise Oversight reported Thursday.

Prices fell in 43 states, according to the agency. Prices were down 3.1% between the first quarter of 2007 and the first quarter of 2008, OFHEO's data showed.

"For homeowners and financial market observers, these declines spell further erosion in home equity levels and potentially more trouble for mortgage markets," said James Lockhart, OFHEO director. "To prospective home buyers who have been shut out of homeownership because of affordability constraints, these declines may be welcome news, as are continued low mortgage rates."

Eight states had quarterly prices declines of more than 3%, while in California and Nevada prices fell more than 8%. The states with the greatest quarterly price appreciation were Wyoming, with a gain of 6.3%, and Utah, up 5.6%.

In the prior quarter, prices declined 1.4%...

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Another chapter in the subprime crisis?

Dora Bonner of Jefferson CountyBloomberg:
JPMorgan Swap Deals Spur Probe as Default Stalks Alabama County -- As nighttime temperatures plunged in Birmingham, Alabama, last October, Dora Bonner had a choice: either pay the gas bill so she could heat the home she shares with four grandchildren, or send the Birmingham Water Works a $250 check for her water and sewer bill.

Bonner, who is 73 and lives on Social Security, decided to keep the house from freezing.

``I couldn't afford the water, so they shut it off,'' she says.

Bonner's sewer bills have risen more than fourfold in the past decade. So have those of others in Jefferson County, which has 659,000 residents and includes Birmingham, the state's largest city.

What's threatening to increase them even more isn't the high cost of treating waste; it's the way county officials chose to finance the $3.2 billion in debt they took on to build a new sewer system. The county relied on advice from a bank, JPMorgan Chase & Co., to arrange its funding, rather than use competitive bidding...
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William M. Isaac / Wall Street Journal:
The Fed and the Mortgage 'Crisis' -- Bear Stearns also marks the first time the Fed has taken meaningful financial risk in facilitating a takeover. This is by far the most troubling aspect of the Fed's rescue effort. If the Fed had simply provided liquidity to Bear Stearns through JPMorgan Chase, I suspect there would be fewer critics of the transaction.

Do we want the Fed underwriting takeovers of failing firms? Are we willing to allow that to happen without a competitive bidding process, which is routinely used when insured banks fail? Would we want the Fed to rescue an insurance company? How about an auto company? In short, what are the rules going forward?

I'm delighted the liquidity crisis has eased, and I believe the Fed had a big hand in that. But I'm deeply troubled by the precedent that has been set and the implications for our financial system.

It might be possible to stuff the genie back into the bottle by restricting the Fed's powers to engage in Bear Stearns-type transactions. Under current law, the FDIC cannot engage in an open-bank rescue package like the one that saved Continental Illinois without receiving a recommendation from the secretary of the Treasury (after consultation with the president), and without receiving approval from two-thirds of the FDIC's board and the board of governors of the Federal Reserve.

It's time for a good debate about the authority and role of our central bank, just as we had about the FDIC in the wake of the Continental Illinois rescue.
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Calculated Risk

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