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Friday, October 31, 2008

More Credit Nightmares Ahead?

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Ed Stein, Rockey Mtn News---
Items of Interest:

NY Times:
Bernanke Says Mortgage System Needs Safeguards -- Development of a system that allows deserving borrowers to obtain home mortgages while minimizing the risks to the country’s financial system and the taxpayers must be “high on the policy agenda,” the Federal Reserve chairman, Ben S. Bernanke, said on Friday.

Mr. Bernanke said the recent bailout of the mortgage finance giants Fannie Mae and Freddie Mac offered a much-needed chance to rethink and clarify the appropriate roles of government-sponsored enterprises whose ambiguous roles, partly public and partly private, have been cited as contributing to the difficulties in the mortgage markets and, consequently, the entire financial system...
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Ellen E. Schultz / Wall Street Journal:
Banks Owe Billions to Executives -- Financial giants getting injections of federal cash owed their executives more than $40 billion for past years' pay and pensions as of the end of 2007, a Wall Street Journal analysis shows.

The government is seeking to rein in executive pay at banks getting federal money, and a leading congressman and a state official have demanded that some of them make clear how much they intend to pay in bonuses this year.

But overlooked in these efforts is the total size of debts that financial firms receiving taxpayer assistance previously incurred to their executives, which at some firms exceed what..
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William Patalon III / Seeking Alpha:
Expert: Proposed Plan to Bail Out Delinquent Homeowners May Face Too Many Problems to Succeed -- million homeowners who are behind on their mortgages from losing their houses will be difficult to administer, and could end up costing the country hundreds of billions of dollars more than the plan’s architects expect, a Money Morning contributing editor and credit-crunch expert said yesterday.

R. Shah Gilani, a retired hedge-fund manager and Money Morning contributing editor who is emerging as an expert on the worldwide financial meltdown, noted that the plan was apparently still that – a plan. Even so, he said that “any bailout plan that directly addresses foreclosures is political posturing that will ultimately be overwhelmed by inevitable economic realities.” ...
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NY Times:
Banks Alter Loan Terms to Head Off Foreclosures -- Even as political pressure builds in Washington for a sweeping program to help struggling homeowners, some banks are realizing that it may be good business to keep borrowers in their homes.

On Friday, JPMorgan Chase became the latest big bank to pledge to cut monthly payments, by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners. Early in October, Bank of America, which acquired the large lender Countrywide, announced a similar effort aimed at 400,000 borrowers as part of a settlement with state officials...
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BusinessWeek:
Lots of homes 'underwater' on mortgages in U.S. -- First American CoreLogic, a data supplier, says that in the July-September period, 18% of all properties with a mortgage were underwater—that is, worth less than the outstanding debt.

The company’s data includes over 80% of all mortgages.

Here are some points from the press release:

• Over 7.5 million mortgages or 18% of all properties with a mortgage were in a negative equity position as of the end of September 2008. There are an additional 2.1 million mortgages that are approaching negative equity. These are defined as mortgages within 5% of being in a negative equity position. Negative-equity and near-negative equity mortgages combined account for over 23% of all properties with a mortgage.• ...
Related:
Minyanville: Housing Downturn Turns Down Further
CNBC / Reuters: Many Homeowners Owe More Than House Is Worth
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HousingBubble blog:
A Hint Of The Nightmare To Come -- “For four years the Neal family called a two-family house in New Haven, home. The Neals have had their house on the market for a year and a half. They’re frustrated but patient. They understand this is a tough time to sell. ‘You’re seeing more and more houses that are in the inventory — I mean there’s tons and tons of inventory,’ Neal said. ‘Everywhere you look there’s a house for sale.’” ...
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57 Percent Price Decrease on Stockton, CA house

USA Today:
Stockton, Calif., tries digging out of foreclosure crisis -- Two years ago, Sharon Halligan drove from Kentucky to California lamenting that she couldn't afford a home in the high-priced state.

Her job search brought her here, and she rented. Then the 61-year-old Halligan watched prices tank as the subprime lending mess engulfed home after home.

This month, the human resources manager moved into her $260,000 two-story home in Stockton after losing seven other bids on foreclosed homes. Thirty months ago, her new house appraised for $608,000. "Isn't it amazing?" she says, standing next to her U-Haul...
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Barry Ritholtz / The Big Picture:
Moral Hazard of the Coming Mortgage Bailout -- Herein lies the simple problem in trying to “save” so many mortgages: A huge swath of them should not be saved. Some of that is due to price, some of it is due to not wanting to reward irresponsible behavior, but the bulk of it is simply because the people living in these homes cannot reasonably afford to pay for them, even after a 20-30% workout.

There are now more than 10 million “home-owers” underwater, with their mortgages greater than the present value of their homes. Since they have little skin in the game — thanks to banks that did away with down payment requirements — there is little incentive for them to tough it out.

Not surprisingly, it is FDIC Chairman Sheila Bair who is leading the push towards a mortgage workout plan. She wants policy makers to take action to help people stay in their homes — thereby taking pressure off of the FDIC, which insures the banks.

Why? More foreclosures = more bank failures = bigger FDIC obligations...
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NY Times:
Specter of Deflation Lurks as Global Demand Drops -- As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.

The word for this is deflation, or declining prices, a term that gives economists chills.

Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament...
Discussion:
Mises Economics Blog / Economics Roundtable: Stuff is cheaper? Time to panic
Meg Marco / Consumerist: What's Worse Than Inflation? Deflation.

Related:
Newmedia / Seattle Post-Intelligencer:
Analysis: Deflation fears on rise as inflation declines — As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy -- the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years...
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Kevin Depew / Minyanville:
Five Things You Don't Want To Know -- When consumer spending and domestic consumption comprises nearly three-quarters of your economy, expanding credit appetites is critically important... if, especially if, you have no savings.

In 1989, when the Japan economy began its descent into a deflationary recession, consumer savings provided a dramatic cushion to the downside. In fact, consumer spending never really deteriorated that much throughout the deflationary recession. This savings was gradually wrested from savers' hands through the central bank's efforts to bring down short-term interest rates to punishingly low levels. In 1989, Japan consumers had a 13% personal savings rate that over 15 years or so fell to about 2%.

Our situation is more frightening. Not only is credit supply contracting, but so is demand, and on top of that we have virtually no savings cushion to offset a deflationary demand shock...
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Douglas McIntyre, 24/7 Wall Street
How Does Amex Fire 7,000 People? -- American Express (AXP) decided to pole axe 7,000 poor souls. As is true with most mass firings, it is driving the company's stock higher, in this case by 5% to just over $26. It still trades near the bottom of its 52-week range.

The layoffs cover 10% of the American Express work force which raises the question of what all of them have been doing up to now. That may appear to be a naive question, but perhaps not...
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24/7 Wall Street:
A Prairie Fire Of Layoffs -- [Motorola, Legg-Mason, Goldman Sach, Time-Warner, Gannett, Yahoo, American Express, Electronic Arts, Whirlpool] -- What the layoff news is showing now, in what is probably the second quarter of a recession which could last for six or seven, is that large corporations believe that their revenues will get much worse and that the chance for improvement is further into the future than most companies believe that they can reasonably gaze.

With each job that is lost at a company that is doing relatively well, the probable depth of the downturn gets worse. Many of the cuts being announced now are based more on confusion and fear than on reason...
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NY Times:
Fed Adds $21 Billion to Loans for A.I.G. -- The American International Group said Thursday that it had been given access to the Federal Reserve’s new commercial paper program, allowing it to reduce its reliance on a costlier emergency loan from the Fed.

The company said it would be able to borrow up to $20.9 billion under the new program, raising its maximum available credit from the Fed to $144 billion under three different programs. The credit includes an earlier emergency loan of $85 billion from the Fed that carries a much higher interest rate.

A.I.G.’s big borrowings underscore the company’s bewilderingly rapid decline. When it suddenly faced a cash crisis in mid-September, the original estimate of the amount it needed was just $20 billion. A few days later, the Fed stepped forward with its $85 billion credit line. And now, the stunning size of that original bailout has grown by almost 70 percent...
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