Friday, November 30, 2007

Housing Slump's Third Year to Be `Deepest' Since WWII (Update1)

By Dan Levy and Brian Louis

Nov. 30 (Bloomberg) -- As the U.S. housing slump enters its third year, there is no sign of dawn in the darkness that is paralyzing home building, home buying and home lending.

Standard & Poor's 15-member Supercomposite Homebuilding Index tumbled 62 percent this year as of yesterday, the largest drop since the benchmark was started in 1995. The companies have lost about $35 billion of market value.

The outlook is bleak with new home sales projected to fall 13 percent in 2008, according to estimates from the National Association of Realtors in Chicago, even as interest rates drop. Losses at Fannie Mae and Freddie Mac, the two biggest U.S. providers of mortgage financing, may restrict the availability of home loans, and chief executive officers at D.R. Horton Inc. and Centex Corp. expect another tough year.

``This looks like it's going to be the deepest correction of any housing correction since World War II, and the question really is, `What's the duration, how long will it be?''' Centex CEO Timothy Eller said at a JPMorgan Chase & Co. conference in Las Vegas on Nov. 27.

The decline in the S&P homebuilding index has pushed the measure to March 2003 levels, with companies including Centex and Pulte Homes Inc. falling more than 65 percent in composite trading on the New York Stock Exchange.

Credit Protection Costs

Total new home sales peaked in July 2005 and have declined for 19 of the last 28 months through October, according to Commerce Department data. Existing home sales peaked in September 2005. The median price for a new home dropped 13 percent in October, the most since 1970, and the annual sales rate for new homes in September was the lowest in almost 12 years.

Bond investors have sought more protection against homebuilders defaulting on debt as revenue and cash flow have declined. Credit protection costs reached 12-month highs in the week ended Nov. 21 for Miami-based Lennar Corp., Bloomfield Hills, Michigan-based Pulte, Dallas-based Centex and Fort Worth, Texas-based D.R. Horton, the four largest U.S. builders by revenue; as well as Calabasas, California-based Ryland Group Inc., a builder in 28 U.S. markets, and Hovnanian Enterprises Inc. of Red Bank, New Jersey, the biggest builder in that state.

`Bankruptcy Risks'

Credit default swap spreads climbed last week by as much as 335 basis points for builders with investment-grade ratings and by an average 209 basis points for those with junk ratings, according to CreditSights Inc., a New York-based research firm. Credit default swaps are contracts to protect bondholders against default. An increase indicates worsening perceptions for credit quality.

``If we talked two weeks ago, I'd say there wasn't much more downside, but the market is acting like there's still a lot more to go,'' said James Wilson, an analyst who follows home builders at San Francisco-based JMP Securities LLC.

Beazer Homes USA Inc., the Atlanta-based homebuilder under investigation by the U.S. Securities and Exchange Commission, and Hovnanian are ``bankruptcy risks,'' Wilson said. Those companies have too much debt and are exposed to slumping housing markets in Florida and Michigan, Indiana and Ohio, he said.

Beazer CEO Ian McCarthy said at this week's conference in Las Vegas that 2008 ``is going to be another tough year.'' The company has a secured credit line of $500 million, he said.

``The company is really looking to make sure its balance sheet and its credit position is strong as we go through this tough time,'' McCarthy said. The company also has agreements ``with our bankers and with our secured credit lenders'' that will ``put us in good stead going forward.''

Worse 2008?

Hovnanian CEO Ara Hovnanian said at the JPMorgan conference that the company has a ``better financial structure than we've ever had.'' Hovnanian's bonds don't start coming due until 2010 and 2012, ``giving us plenty of breathing room,'' he said.

``We're experienced operators, been around for almost 50 years,'' Hovnanian said. ``We will clearly persevere and thrive in the eventual upturn as we have after every cycle.''

Many homebuilding executives at the conference said they expect the slump to last through 2008.

Next year ``is going to be worse than '07 for us and for the industry in general,'' said Donald Tomnitz, D.R. Horton's CEO.

At least three closely held companies filed for bankruptcy protection in the past month, including Fort Lauderdale, Florida-based Levitt and Sons LLC, the 1949 pioneer of planned suburbs with Levittown on New York's Long Island. Tousa Inc. of Hollywood, Florida, which has lost 99 percent of its stock market value this year, said this month it was considering filing for Chapter 11 bankruptcy protection.

Tousa's Strategy

Tousa acquired 22,000 home sites in Florida through a joint venture in August 2005, when the housing market was close to its peak. Florida accounted for five of the top 25 U.S. metropolitan areas with the highest foreclosure rates this year through Sept. 30, according to RealtyTrac Inc. The Irvine, California-based seller of foreclosure data has a database of more than 1 million U.S. properties.

The New York Stock Exchange suspended trading in Tousa on Nov. 19 because the average closing price was less than $1 for 30 straight trading days. Tousa last traded at 8 cents, down from a seven-year high of $30 in August 2005.

Standard Pacific Corp., based in Irvine, California, is the worst performer in the S&P homebuilding index, dropping 89 percent. Home sales in California, the company's largest source of revenue, fell 40 percent and median prices for existing homes slid 9.9 percent in October, data compiled by the California Association of Realtors show.

Housing Glut

A housing rebound is unlikely, as about 1 million adjustable loans made to subprime borrowers, those with weak or incomplete credit histories, are scheduled to reset at a higher rate in 2008, according to RealtyTrac.

That may put many homeowners at risk of foreclosure and lower the value of neighboring houses, said Rick Sharga, vice president of marketing at RealtyTrac. About 1.3 million subprime mortgages will be in foreclosure by September 2009, including actions already under way, according to estimates from New York- based analysts at Credit Suisse Group.

``There is just no quick fix, including further rate cuts, to stabilize the current weakness in the housing market,'' said CreditSights analysts Frank Lee and Sarah Rowin in a Nov. 23 report to clients.

Discounted Prices

Builders must contend with a glut of existing homes on the market. There's an almost 11-month supply of unsold existing homes, the highest in more than eight years, according to data from the National Association of Realtors.

The decline in the market for existing homes is lagging ``far behind'' the new home market, and resale prices have only started to erode, said Citigroup Inc. analyst Stephen Kim in a Nov. 23 report.

``We have never before seen how a belated dropoff in existing home prices will affect already discounted prices for new homes, but it is difficult to be optimistic here,'' Kim wrote.

Citigroup cut its rating on Lennar, Centex, Los Angeles- based KB Home, D.R. Horton, Ryland, Pulte and Standard Pacific to ``hold'' from ``buy.'' Meritage Homes Corp. in Scottsdale, Arizona, was reduced to ``sell'' from ``hold.''

Cash flow will assume even greater importance as homebuilders owe $875 million in debt payments in 2008 and then about $1.6 billion in 2009 and 2010, data compiled by CreditSights show.

`Hard Year'

Potential legal costs also may hurt the builders, said Lee of CreditSights. D.R. Horton, Hovnanian and Reston, Virginia- based NVR Inc. are being sued by consumers who said they were coerced into taking loans from the company's mortgage units. The top 10 builders made $2.1 billion from providing financial services such as mortgages and title insurance last year, according to data compiled by UBS AG.

Investigations of builders may also weigh on the companies. The U.S. Department of Housing and Urban Development is examining whether builders received kickbacks when selling property. Pulte and KB Home are among six homebuilders that agreed last month to pay a total of $1.4 million to settle federal probes into whether they accepted rebates from insurers for referrals when selling homes.

New York, Ohio and at least six other states are investigating the mortgage industry, including whether appraisers, mortgage brokers and lenders may have inflated home values. Resolving the complaints ``could run into the millions or billions'' of dollars, CreditSights's Lee said.

``There will be some bankruptcies, some consolidations, some private equity plays,'' said Kenneth Rosen, chairman of the University of California's Fisher School of Real Estate and Urban Economics in Berkeley. ``It's going to be another hard year.''

Tuesday, November 27, 2007

U.S. Economy: Confidence Drops More Than Predicted (Update2)

By Shobhana Chandra and Bob Willis

Nov. 27 (Bloomberg) -- Consumer confidence fell more than forecast in November as Americans struggled with surging fuel costs and falling home prices.

The Conference Board's confidence index decreased to 87.3, the lowest level since the aftermath of Hurricane Katrina in 2005, the New York-based group said today. House values dropped 4.5 percent in the third quarter from a year earlier, the most since records began in 1988, S&P/Case-Shiller reported separately today.

The gloomier mood increases the likelihood that holiday sales, which account for a fifth of retailers' yearly revenue, will be disappointing. Federal Reserve policy makers and private economists have cut growth forecasts as the housing slump enters its third year and jeopardizes consumer spending.

``This is a strong indication that consumers are going to pull back sharply and growth is going to be very weak,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The message to the Fed should be that they need to keep cutting rates.''

October's confidence reading was revised down to 95.2, from a previously reported 95.6. None of the 67 economists surveyed by Bloomberg News predicted the size of the decline. The median forecast was 91.

Stocks Jump

Treasury securities remained lower and stock prices rose following the reports as investors focused on news that Citigroup Inc. will receive a cash infusion from Abu Dhabi's government. The Dow Jones Industrial Average was up 124 points, or 1 percent, at 2:59 p.m. in New York.

Property prices may keep sliding in coming months as slowing sales and rising foreclosures aggravate the glut of unsold homes, economists said.

The housing recession will drive down property values by $1.2 trillion next year and slash tax revenue by more than $6.6 billion, according to a report issued today by the U.S. Conference of Mayors. The 361 largest U.S. cities will experience a combined loss of $166 billion in economic growth, led by $10.4 billion in the New York-Northern New Jersey area, according to the study.

``We do have an immediate crisis,'' Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, said in an interview. ``It might push this country into recession.''

Other Reports

Lower property values make it harder for owners to tap home equity, while gasoline at more than $3 a gallon and higher home- heating bills also sour Americans' mood. A report last week showed the Reuters/University of Michigan sentiment index fell this month to a two-year low.

Compared with other sentiment gauges, the Conference Board's index tends to be more influenced by attitudes about the state of the labor market, economists said.

An average of 330,000 workers filed first-time claims for jobless benefits per week in November, up from 306,000 as recently as July. The increase suggests firings are mounting as businesses try to cut costs.

Fed policy makers are counting on wage gains to help Americans maintain spending, according to the minutes of their Oct. 31 meeting. Still, there was a risk falling home prices could ``further sap consumer confidence.''

Expectations Slump

The Conference Board's measure of present conditions fell to 115.4 from 118 the prior month. The gauge of expectations for the next six months decreased to 68.7, the lowest since March 2003, from 80.

Today's report showed the share of consumers who said jobs are plentiful retreated to 23.2 percent in November from 24.1 percent the prior month. The proportion of people who said jobs are hard to get also decreased to 21.3 percent from 22.8 percent.

The proportion of people who expect their incomes to rise over the next six months dropped to 18.7 percent from 19.9 percent. The share expecting more jobs decreased to 10.8 percent from 13.3 percent.

The number of people planning to buy a home or an automobile within the next six months fell.

``The heating bills are a big worry, but behind that is also the worry that jobs might be in jeopardy,'' Kenneth Goldstein, a Conference Board economist, said in an interview.

Retail Profits

Retailers are bracing for a slowdown through the holidays and into 2008. Target Corp., the second-biggest U.S. discounter, last week reported its first profit decline in two years, and said it expects slowing sales growth through the first quarter.

The National Retail Federation this week maintained its forecast that combined sales for November and December will show the smallest increase in five years even after purchases were stronger than forecast after the Thanksgiving holiday. Americans spent less per person even as more went shopping, the group said.

``Elevated energy costs and the anticipation of further increases continues to impact Americans' ability to spend on discretionary projects,'' Robert Niblock, chief executive officer of Lowe's Cos., the second-largest home improvement retailer, said on a conference call last week. ``Access to mortgage financing is a concern we'll continue to watch.''

To contact the reporter on this story: Shobhana Chandra in Washington at Bob Willis in Washington at

Last Updated: November 27, 2007 15:01 EST

S&P: 3Q Home Prices Fall by 4.5 Percent

By J.W. Elphinstone, AP Business Writer
Tuesday November 27, 9:52 am ET

NEW YORK (AP) -- U.S. home prices fell 4.5 percent in the third quarter from a year earlier, the sharpest drop since Standard & Poor's began its nationwide housing index in 1987 and another sign that the housing slump is far from over, the research group said Tuesday .

The index also showed that prices fell 1.7 percent from the previous three-month period, the largest quarter-to-quarter decline in the index's history.

The S&P/Case-Schiller quarterly index tracks prices of existing single-family homes across the nation compared with a year earlier.

A separate index that covers 20 U.S. metropolitan areas dropped 4.9 percent in September from a year earlier, with 15 metro areas posting declines. Only five metro areas -- Atlanta, Charlotte, N.C., Dallas, Portland, Ore., and Seattle -- showed an increase in prices, but S&P noted that the pace of the rise is decelerating.

Tampa and Miami led the index with the lowest year-over-year declines at 11.1 percent and 10 percent, respectively. It also showed drops in San Diego of 9.6 percent; Detroit, 9.6 percent; Las Vegas, 9 percent; Phoenix, 8.8 percent; and Los Angeles, 7 percent.

The S&P's 10-area index decreased 5.5 percent in September from the previous year.

Last week, the National Association of Realtors said that sales of existing homes fell in 46 states in the third quarter. However, the trade group said home prices rose in 93 of the 150 metropolitan areas surveyed.

Sunday, November 25, 2007

Home Sales May Drop, Durable Orders Stall: U.S. Economy Preview

By Shobhana Chandra

Nov. 25 (Bloomberg) -- U.S. home sales fell in October to the lowest in at least eight years and business spending stalled as the real-estate slump rippled through the economy, economists said before reports this week.

Total purchases of new and existing homes fell 1 percent to an annual pace of 5.75 million, according to the median estimate of economists surveyed by Bloomberg News. Orders for long- lasting goods were little changed following the biggest back-to- back declines in at least 15 years, a separate report may show.

The housing recession will persist into 2008 as banks tighten lending rules, foreclosures rise and prospective buyers wait for further price declines, economists said. Business and consumer spending are likely to cool this quarter, leading to a deceleration in growth.

``The reports could paint a soft picture at the start of the fourth quarter,'' said Jonathan Basile, an economist at Credit Suisse Holdings Inc. in New York. ``The fundamentals in the housing sector are still weak with regards to demand and supply. On the manufacturing side, things aren't overly optimistic either.''

The National Association of Realtors is scheduled to report sales of existing homes on Nov. 28. Economists in the survey estimate that resales fell to a 5 million annual rate last month, the lowest level since comparable records began in 1999.

New-home sales, due from the Commerce Department a day later, slipped to a 750,000 pace, according to the survey median. Purchases were at an 11-year low 735,000 rate in August.

Existing-home sales account for about 85 percent of the market, and purchases of new homes make up the rest.

Timelier Gauge

New-home purchases are considered a timelier indicator because they are based on contract signings, while existing home sales are calculated when a contract closes, usually a month or two later.

D.R. Horton Inc., the second-largest U.S. homebuilder, on Nov. 20 reported a fiscal fourth-quarter loss and its worst annual results in at least a decade.

Next year will be ``more difficult'' than 2007, Donald Tomnitz, chief executive officer of D.R. Horton, said on a conference call. ``There's less volume, and the volume that is there is demanding better pricing.''

Home prices in 20 metropolitan areas probably dropped 5 percent in the 12 months to September, the most since record keeping began in 2001, a report from Standard & Poor's/Case- Shiller Nov. 27 is forecast to show.

Consumer Headwinds

Falling property values combined with rising fuel costs and reduced access to credit suggest consumer spending, which accounts for more than two-thirds of the economy, will slow.

Commerce Department figures due Nov. 30 may show spending grew 0.3 percent in October for a second month, according the survey median. Spending adjusted for inflation, the gauge used to calculate economic growth, was probably little changed, economists said.

Bank of America Corp. and JPMorgan Chase & Co. are among banks that have lowered growth forecasts in recent weeks, in part because of a projected slowdown in consumer spending. The economy is likely to grow at less than a 1 percent annual pace this quarter and next, according to economists at Bank of America.

Such an outcome would mark a sharp slowdown from the previous three months. Revised figures from the Commerce Department on Nov. 29 are forecast to show that gross domestic product rose at an annual rate of 4.9 percent from July through September, a percentage point more than the government estimated last month and the most in four years.

Work Off Inventories

A bigger jump in inventories than previously estimated will contribute to the revision, economists said. The need to work off some of those stockpiles this quarter will have a hand in the projected growth deceleration.

The Nov. 28 Commerce Department report on orders for durable goods, those made to last at least several years, may show that business investment in new equipment has also slackened, economists said.

Federal Reserve policy makers reduced their growth forecasts when they last met on Oct. 31, according to meeting minutes released last week. Central bankers projected the economy would grow between 1.8 percent and 2.5 percent in 2008, ``notably below'' their last forecast issued in July, the minutes said.

Investors almost universally expect strains in financial markets and the slowdown in growth will cause the Fed to again lower the target on the benchmark interest rate when policy makers next meet on Dec. 11.

Bloomberg Survey

Date Time Period Indicator BN Survey
11/27 10:00 Nov. Confidence-Conf. Board 91.0 95.6
11/28 8:30 Oct. Durable Goods Orders 0.0% -1.7%
11/28 10:00 Oct. Home Resales 5.00M 5.04M
11/29 8:30 3Q P GDP Price Index 0.8% 0.8%
11/29 8:30 3Q P Gross Domestic Product 4.9% 3.9%
11/29 8:30 11/24 Initial Jobless Claims 330K 330K
11/29 8:30 11/17 Continuing Claims 2575K 2566K
11/29 10:00 Oct. New Home Sales 750,000 770,000
11/30 8:30 Oct. Personal Income 0.4% 0.4%
11/30 8:30 Oct. Personal Spending 0.3% 0.3%
11/30 10:00 Nov. Chicago Purchasers 50.5 49.7
11/30 10:00 Oct. Construction Spending -0.3% 0.3%

To contact the reporter on this story: Shobhana Chandra in Washington at

Last Updated: November 25, 2007 10:03 EST

Saturday, November 24, 2007

Mortgage Failures Could Create Nightmare

Saturday November 24, 12:02 am ET
By Joe Bel Bruno, AP Business Writer

New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario

NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.
His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs.

Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.

In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is anyone's guess, but some believe it could become very bad.

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the Sept. 11, 2001, terror attacks hurt the transportation and allied industries. Economists said the country was officially in recession from March to November of 2001, but the aftermath stretched to 2003.

There is increasing evidence that another downturn has begun.

Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from Arlington, Va.-based investment bank Friedman, Billings Ramsey. That's making it even harder for would-be buyers to get new mortgages -- a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the third quarter from a year earlier, to 446,726 homes nationwide, according to Irvine, Calif.-based RealtyTrac Inc. That's one foreclosure filing for every 196 households in the nation, a 34 percent jump from just three months earlier.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

Some homebuyers gambled on interest-only loans. The mortgages, which allowed buyers to pay just interest at a low rate for two years, were too good to pass up. But with that initial term now expiring, many homeowners find they can't make the payments. The hopes that went along with those mortgages -- that they'd be able to refinance because the equity in their homes would appreciate -- have been dashed as home prices skidded across the country.

"It's been said a lot of people have been using their homes as ATM machines," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant. "The risk has a lot of tentacles."

This example illustrates the distress many homeowners are in or will find themselves in: A subprime adjustable-rate mortgage on a $400,000 home could have payments of about $2,200 a month, with borrowers paying 6.5 percent, interest only. When the teaser period expires, that payment becomes $4,000, with the homeowner paying 12 percent and now having to come up with principal as well as interest.

Minneapolis resident Chad Raskovich found himself in a such a situation. He hoped -- it turned out, in vain -- to gain more equity in his home and that a strong record of payments would enable him to secure a better loan later on.

"It's not just me, it's a lot of people I know. The housing market in the Twin Cities has dramatically changed for the worse in the years since I purchased my home. Now we're just looking for a solution," he said.

Colombo, who lives in the planned community of Weston just outside Ft. Lauderdale, said the reset on his home would have "destroyed' his financial situation. He went to Mortgage Repair Center, one of hundreds of debt counselors trying to bail out desperate homeowners, to work with his lender.

"But many people in my neighborhood didn't get help, and some have literally just walked away from their homes," said Colombo. "There are over 133,000 homes on the market in Broward-Miami-Dade counties, and some of them were actually abandoned. People in this situation don't like to talk about it, and end up getting hurt because they don't."

Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy.

But the series of plunges that Wall Street has suffered in past months prove that no one is immune when mortgages turn sour.

Today's financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.

When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans and the securities that underpin them are in jeopardy.

This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks -- losses that could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on.

There's more pain left for Wall Street: "We're nowhere close to the end of the collapse," said Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisors, a hedge fund that specializes in distressed funds.

"I just assumed banks could stomach these kind of losses," said Wendy Talbot, an advertising executive when asked about the subprime crisis outside of a Charles Schwab branch in New York. "I guess you don't really pay attention to things until your forced to. ... You put out of your mind the worst things that can happen."

The subprime wreckage could dwarf the nation's last big banking crisis -- the failure of more than 1,000 savings and loans in the 1980s. The biggest difference is that problems with S&Ls were largely contained, and the government was able to rescue them through a $125 billion bailout.

But this situation is far more widespread, which some experts say makes it more difficult to rein in.

"What really makes this a doomsday scenario is where would you even start with a bailout?" housing consultant Lawler asked.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

"There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle," Schumer said. "You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

There's also been talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors. This would extend the government's support, and its exposure, to the mortgage market to help alleviate stress.

Either way, the impact of a fresh round of subprime losses remains of paramount concern to economists -- especially since there's little certainty about how it would ripple through the U.S. economy.

"We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it," said Lawler, who was once chief economist for Fannie Mae.

"We've never been in this situation before."

Thursday, November 22, 2007

When the levee breaks

By Chuck Jaffe, MarketWatch
Last Update: 4:21 PM ET Nov 22,

Even average homeowners feel rising mortgage floodwaters

BOSTON (MarketWatch) -- While the headlines have been full of stories on the credit crunch, subprime mortgage mess and the real estate bubble, a lot of ordinary homeowners have figured they were immune from the problems.

Ensconced in a home with a prime mortgage, they have watched the news and figured they're safe. And all the while, the water has been rising.

With property values dropping in many areas of the country, a growing number of homeowners -- particularly those who bought their house in the last five years -- are looking at the prospect of being "underwater" on the mortgage. That's when the value of the home is less than the amount remaining on the loan used to buy it.

So while the nation has been focused on a record-high rate of foreclosures, the tide has been rising on a lot of people who simply had bad timing., an online real estate community, reported Tuesday that home values nationally are down more than 5.5% compared with a year ago, with many markets being hit much harder.

As a result, according to Zillow, more than 15% of homeowners nationwide who bought their home in the last year are now underwater. The number is slightly worse for consumers who bought their home two years ago. By comparison, the study showed that just under 2% of people who purchased a home five years ago have seen their equity go negative.

"We are so used to the fantasy that real estate is a great investment and that it always goes up in value that we're surprised when it doesn't," says Marc Eisenson of Good Advice Press, author of the 1980s classic "The Banker's Secret," the book which first taught Americans the value of prepaying mortgages and auto loans.

"This is a scary place to be, and a lot of people who never expected to get here are watching the waters rising -- particularly if they have adjustable-rate mortgages -- and their home values sinking."

Being underwater on a loan -- and it's increasingly common on auto loans in this country too -- is not really a function of interest rates and payments. The problem that adjustable-rate mortgages pose in this market is more psychological, in that the borrower's payments are likely to rise while the asset they are paying for is depreciating. The amount owed is the same before or after the adjustment, but the higher payments simply make the situation feel more helpless.

Riding it out

Thankfully, most experts suggest that negative home equity is not something that should cause a panic, assuming the homeowner can afford the current mortgage payment and has no reason to move.

"It could take five years or longer before this thing swings around, but as long as cash flow is positive -- so that you're making the payments and living life without worrying where the equity stands in your home -- you can ride this out," says Paul Richard, director of education at the Institute for Consumer Financial Education. "The question is whether you will want to hold on to your investment if you have lost 10% or 15% or more and don't see it turning around. ... You wouldn't want to do that with most mutual funds, but you will have to decide if you will do it with your house."

For most homeowners, selling the home doesn't necessarily solve the problem. After all, if they are underwater on the mortgage, they will need to bring cash to the closing. And while they may be able to buy the next home for a lot less -- due to the drop in home prices -- there is no guarantee they will get a good mortgage rate to make the deal happen.

Renting and waiting out the decline and the real estate cycle is an option, but more for the prospective home buyer rather than the person who is up to their neck on the mortgage.

"If you can afford the payments and bought in a market that you believe will go up, then the way out of this is to drive through it, keep making the payments and plan to hold on long enough so that it pays off," says Greg McBride, senior financial analyst for "It's only a real problem if you're going to have to sell the house in these conditions, or if you can't make the payment."

Watch your dollars

That said, most experts also believe that when the waters are coming closer to your personal shore, you might want to change a few behaviors, even if you plan to stay in the house and ride it out.

For starters, put off significant investments in the home. While real estate agents frequently say that certain home improvements "pay for themselves" when the home is sold, that's not the case in a market where home prices are shrinking and mortgages are underwater. Instead, you're simply adding more water.

Says Eisenson: "If you want a new bathroom while your house is underwater, you need to be really confident that you can ride things out. ... Right now, you're making the situation worse by putting more into the home at a time when you possibly won't make it back."

Next, bolster the emergency fund, just in case. It's not just financial problems making headlines, but economic ones; if the economy hits home in the form of job loss, at a time when the home is underwater, the choices you're facing are ugly. A bigger cash cushion will keep options open.

Experts disagree on whether you should pay off the mortgage faster when it's underwater; paying additional principal drops the water level, but that money is not coming back if you have to move and sell the house before the market rebounds.

Paying down other debts, or putting excess cash into investments that will be positive while real estate is in the doldrums may do more to improve a homeowner's overall financial position.

Says Eisenson: "This situation is going to get worse before it gets better, so think about what you would do now. You'll probably decide to try to push through it, but if you're unprepared and you wake up one day to find out you're underwater, you're going to be scared."

Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.

Tuesday, November 20, 2007

17 reasons America needs a recession

Think positive, this 'slow motion train wreck' is good for the U.S.

By Paul B. Farrell, MarketWatch
Last Update: 6:53 PM ET Nov 19, 2007

ARROYO GRANDE, Calif. (MarketWatch) -- Yes, America needs a recession. Bernanke and Paulson won't admit it. And investors hate them. We're all trapped in outdated 1990s wishful thinking about a "new economy" and "perpetual growth."

But the truth is, not only is a recession coming, America needs a recession. So think positive: Let's focus on 17 benefits from this recession.

To begin with, recession may be an understatement. Jeremy Grantham's GMO firm manages $150 billion. In his midyear report before the credit crisis hit he predicted: "In 5 years I expect that at least one major 'bank' (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private-equity firms in existence today will have simply ceased to exist."

He was "watching a very slow motion train wreck." By October, it was accelerating: "Train hits end of track at full speed."

Also back in August, The Economist took a hard look at the then emerging subprime/credit crisis: "The policy dilemma facing the Fed may not be a choice of recession or no recession. It may be between a mild recession now, and a nastier one later."

However, the publication did admit that "even if a recession were in America's long-term economic interest, it would be political suicide" for Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to suggest it.

Then The Economist posed the big question: Yes, "central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether."

Wrong to prevent a recession? Why? Because recessions are a natural and necessary part of the business cycle. Remember legendary economist Joseph Schumpeter, champion of innovation and entrepreneurship?

Economists love Schumpeter's "creative destruction:" Obsolete firms get destroyed and capital released, making way for new technologies, new businesses, like Google. And yet, nobody's willing to apply Schumpeter's theory to the entire economy ... and admit recessions are a natural part of the business cycle.

Instead, everyone persists in the childlike fairy tale that "all growth is good" and "all recessions are bad," a bad hangover of the '90s "new economy" ideology. So for the folks at the Fed, Treasury and Wall Street, "eternal growth" is still America's mantra.

Unfortunately, the American investors' brain has also developed this blind obsession with "growth-at-all-costs," coupled with a deadly fear of all recessions, as if recessions are a lethal super-bug more powerful than Iran with a bomb.

Our values are distorted: It's OK to be greedy and overshoot the market on the upside -- grab too many assets, take on too much debt, make consumer spending a religion, live beyond our means, ignite hyperinflation along the way. Growth is good, even in excess.

And yet, recessions are a no-no that drives politicians, economists and investors ballistic.

Well, folks, you can block all this from your mind, you can argue that recessions are not a part of Schumpeter's thinking, that they are inconsistent with your political ideology. But the fact is, we let the housing/credit boom become a massive bubble, it popped and a recession is coming. So think positive, consider some of the benefits of a recession:

1. Purge the excesses of the housing boom

No, it's not heartless. Not like wartime calculations of "acceptable collateral damage." Yes, The Economist admits "the economic and social costs of recession are painful: unemployment, lower wages and profits, and bankruptcy." But we can't reverse Greenspan's excessive rate cuts that created the housing/credit crisis.

It'll be painful for everyone, especially millions of unlucky, mislead homeowners who must bear the brunt of Wall Street's greed and Washington's policy failures.

2. U.S. dollar wake-up call

Reverse the dollar's free fall and revive our global credibility. Warnings from China, France, Iran, Venezuela and supermodel Gisele haven't fazed Washington. Recession will.

3. Write-offs

Expose Wall Street's shadow-banking system. They're playing with $300 trillion in derivatives and still hiding over $100 billion of toxic off-balance sheet asset-backed securities, plus another $300 billion hidden worldwide. A lack of transparency is killing our international credibility. Write it all off, now!

4. Budgeting

Force fiscal restraint back into government. America has been living way beyond its means for years: A recession will cut back revenues at all levels of government and cutbacks will encourage balanced budgeting.

5. Overconfidence

A recession will wake up short-term investors playing the market. In bull markets traders ride the rising tide, gaining false confidence that they're financial geniuses. Downturns bruise egos but encourage rational long-term strategies.

6. Ratings

Rating agencies have massive conflicts of interest; they aren't doing their job. They're supposed to represent the investors, but favor Corporate America, which pays for the reports. Shake them up.

7. China

Trigger an internal recession in China. Make it realize America's not going into debt forever to finance China's domestic growth and military war machine. A recession will also slow recycling their reserves through sovereign funds to our equities.

8. Oil

Force the energy and auto industries to get serious about emission standards and reducing oil dependency.

9. Inflation

Expose the "core inflation" farce Washington uses to sugarcoat reality.

10. Moral hazard

Slow the Fed from cutting interest rates to bail out speculators.

11. War costs

Force Washington to get honest about how it's going to pay for our wars, other than supplemental bills that are worse than Enron-style debt financing.

12. CEO pay

Further expose CEO compensation that's now about five hundred times the salaries of workers, compared with about 40 times a generation ago.

13. Privatization

Stop the privatization of our federal government to no-bid contractors and high-priced mercenary armies fighting our wars.

14. Entitlements

Force Congress to get serious about the coming Social Security/Medicare disaster.

With boomers now retiring, this problem can only get worse: A recession now could avoid a depression later.

15. Consumers

Yes, we're all living way beyond our means, piling up excessive credit-card debt, encouraged by government leaders who tell us "deficits don't matter." Recessions will pressure individuals to reduce spending and increase savings.

16. Regulation

Lobbyists have replaced regulation. Extreme theories of unrestrained free trade plus zero regulation just don't work; proven by our credit crisis, hedge funds' nondisclosures, private-equity taxation, rating agencies failures, junk home mortgages, and more. Get real, folks.

17. Sacrifice

"We have not seen a nationwide decline in housing like this since the Great Depression, says Wells Fargo CEO John Stumpf. As individuals and as a nation Americans have always performed best in crises, like the Depression or WWII, times when we're all asked to make sacrifices. Pampering us with interest-rate cuts and tax cuts during the Iraq and Afghan wars may have stimulated the economy temporarily, but they delayed the real damage of the '90s stock bubble while setting the stage for this new subprime/credit crisis.

Wake up, the train wrecked. Time to think positive, find solutions, demand sacrifices.

Goldman paints bleak picture for housing, financials

Tue Nov 20, 2007 7:19am EST

NEW YORK (Reuters) - Goldman Sachs issued a gloomy report on the U.S. financial services sector, saying housing prices are likely to fall a lot further, write-downs will mount and some mortgage insurers and guarantors will be forced to raise capital just to survive.

Falling house prices and a worsening economy will drive down securities based on residential mortgages, especially those given to borrowers with the riskiest credit, Goldman Sachs financial analysts Lori Appelbaum, Thomas Cholnoky, James Fotheringham and William Tanona, wrote in a lengthy report released on Monday.

Meanwhile, the value of collateralized debt obligations -- bonds based on pools mortgages -- related to those subprime mortgages, could fall another $150 billion across the industry, the bank said.

That's on top of the $18 billion financial firms globally wrote down in the third quarter and the $22 billion that some companies have indicated they expect in the fourth quarter.

Share markets across the globe sank after an earlier report from the Goldman analysts downgrading Citigroup (C.N: Quote, Profile, Research) reignited fears that losses from the global credit crisis may widen.

Stock benchmarks in the United States fell to their lowest levels in three months on Monday. In Asia MSCI's measure of other Asia Pacific stocks (.MIAPJ0000PUS: Quote, Profile, Research) hit its lowest level since late September. Financial stocks were among the worst affected.

Inevitability, certain financial guarantors and mortgage insurers will need to raise capital to shore up their balance sheets. The Goldman analysts said these companies will fall into two groups, the desperate -- those which will face the risk of going out of business if they don't raise capital -- and the needy -- those that could employ other means to do so, such as cutting dividends.

Goldman lists financial guarantors MBIA Inc (MBI.N: Quote, Profile, Research), Ambac Financial Group Inc, Security Capital Assurance Ltd (SCA.N: Quote, Profile, Research) and Assured Guaranty Ltd (AGO.N: Quote, Profile, Research) as the desperate. It lists Citigroup Inc, Washington Mutual Inc (WM.N: Quote, Profile, Research), First Horizon National Corp (FHN.N: Quote, Profile, Research) and National City Corp (NCC.N: Quote, Profile, Research) in the "needy" column.

Without the riskier loans such as subprime or no-or-low documentation mortgages, returns in the mortgage business will be significantly lower.

"Investor appetite for high-yielding subprime mortgage securities fuelled the home pricing bubble and this investor market is not coming back," the analysts wrote.

Brokers will rethink their business models focused on these exotic loans, the analysts said.


With home prices, consumer credit deterioration is not far off. The downturn in housing is spilling over into employment in some states and is leading to high consumer losses, the analysts said.

Falling home prices have put one-third of the United States, by Gross Domestic Product, in or near recession, the analysts wrote. California is the biggest concern as it represents 13 percent of the U.S. GDP. Card and auto losses will rise.

Although financial companies across the board have seen their stock prices walloped, despite attractive valuations, Goldman says a broad wave of industry consolidation is still another 12 to 18 months away.

"Credit risk, balance sheet deterioration, and business model risk continues to outweigh low valuations," the analysts wrote.

"We believe acquisitions are unlikely to occur until balance sheets stabilize and a market bottom is in sight," the analysts said.

Once U.S. housing shows signs of bottoming out, there will be some solid but tarnished companies investors will view as likely acquisitions targets.

Suitors are likely to come from all parts of the globe, even from emerging economies such as China or India, as the dollar remains weak.

"We would not be surprised to see the first acquisition of a major U.S. broker or commercial bank by an emerging market institution," the analysts wrote.

Earlier on Monday, the analysts downgraded Citigroup (C.N: Quote, Profile, Research) to a sell because of its exposure to CDO revaluations and Discover Financial Services (DFS.N: Quote, Profile, Research) because of its vulnerability to consumer credit deterioration. In the report, the analysts suggested pairing trades with these companies.

* Go long on American Express Co (AXP.N: Quote, Profile, Research) shares and short Discover

* Go long on Lehman Brothers Holding's (LEH.N: Quote, Profile, Research) shares and short Citigroup

Additionally, the firm believes that three financial "babies" have been "thrown out with the bathwater" and recommend buying American International Group Inc (AIG.N: Quote, Profile, Research), US Bancorp (USB.N: Quote, Profile, Research) and aircraft lessors, such as AerCap Holdings NV (AER.N: Quote, Profile, Research), Aircastle (AYR.N: Quote, Profile, Research), and Genesis Lease Ltd (GLS.N: Quote, Profile, Research).

Additionally it recommends another pair trade; go long on U.S. Bancorp's shares and short First Horizon.

(Reporting by Ilaina Jonas; editing by Louise Heavens)

Freddie Mac loses $2B, seeks new capital

By MARCY GORDON, AP Business Writer

WASHINGTON - Freddie Mac, the nation's No. 2 buyer and guarantor of home loans, lost $2 billion in the third quarter and said Tuesday it must raise fresh capital to meet regulatory requirements. Its shares fell more than 26 percent.

The quarterly loss was the largest ever for Freddie Mac which, like its larger government-sponsored competitor Fannie Mae and a number of large investment banks, has been slammed in recent months by rising defaults on home mortgages.

The mortgage financier said it is "seriously considering" cutting in half its dividend in the fourth quarter and has hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as financial advisers to help it examine possible new ways of raising capital in the near future.

Freddie Mac said it set aside $1.2 billion in the turbulent July-September period to account for bad home loans, reflecting "the significant deterioration of mortgage credit."

Executives said Tuesday there was little to be optimistic about in the fourth quarter and told investors to brace for more of the same, sending shares on the greatest one-day plunge since public trading began for Freddie nearly two decades ago.

Losses widened from $715 million during the same period last year. The report sent shares tumbling $9.89 to $26.37 Tuesday.

The company posted negative revenue of $678 million, as it sustained losses under generally accepted accounting principles of $3.6 billion in the quarter. The revenue compared with positive revenue of $91 million a year earlier.

The $2 billion third-quarter loss for McLean, Va.-based Freddie Mac worked out to $3.29 a share, compared with $1.17 a share in the third quarter of 2006.

Losses far exceeded Wall Street analysts expectations of a 22 cent per-share loss, according to a poll by Thomson Financial.

The results for Freddie Mac, together with a recent report by Fannie Mae, heighten investor anxiety over the government-sponsored companies, which had been considered less vulnerable in the housing crisis because they have had less exposure to high-risk, subprime mortgages.

Freddie Mac's regulatory core capital was estimated to be just $600 million in excess of the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight.

If dividend cuts and other actions aren't sufficient to help the company reach its government-mandated level of capital held in reserve as a cushion against risk, Freddie Mac said it may consider other measures such as limiting its growth, reducing the size of its mortgage investment holdings or issuing new stock.

That could put additional strain on a housing market suffering the worst slump in more than 15 years.

Freddie Mac has traditionally funded the mortgage market when other banks pull back because of risk.

An inability by Freddie Mac to fill that role could hinder a return to equilibrium in the mortgage market and possibly intensify the housing downturn.

"Without doubt, 2007 has been an extremely difficult year for the country's housing and credit markets and, as our third-quarter financial results reflect, we have been impacted by the deterioration in these markets," company Chairman and CEO Richard Syron said in a statement. "We recognized the challenges facing the mortgage markets, however, and have taken further steps to address them."

So far this year, Freddie Mac has recognized $4.6 billion in pretax credit related items.

Buddy Piszel, chief financial officer, said Freddie Mac is moving to stem losses.

"We have begun raising prices, tightened our credit standards and enhanced our risk management practices," Piszel said. "We also continue to improve our internal controls."

"We were getting thin" in terms of excess capital, and Freddie Mac decided it needed to bolster its capital "to manage through this credit cycle," Piszel said in a telephone interview. That cycle isn't expected to improve until 2009, he said, with home prices projected to register a 5 percent to 6 percent decline nationwide.


On the Net:

Freddie Mac:

Fannie Mae:

Commentary: U.S. economy is freezing up

Rough patch or briar patch
By Dr. Irwin Kellner, MarketWatch
Last Update: 11:29 AM ET Nov 20, 2007Print E-mail Subscribe to RSS Disable Live

PORT WASHINGTON, N.Y. (MarketWatch) -- Whether the Federal Reserve realizes it or not, the United States economy is reeling from a one-two punch of plunging real estate values and a full-blown credit crunch that might not be alleviated with additional rate cuts.

While the Fed might have had a role in creating what has come to be known as the subprime mess, because of the way it has evolved, the Fed's ability to deal with it is rather limited. There are a number of reasons for this.

First and foremost is the fact that, on the real estate side, the damage has already been done.

Because short-term interest rates today are well above the 45-year lows plumbed from the middle of 2003 through mid-2004, those mortgages with adjustable rates have -- or will -- reset to much higher rates even if the Fed decides to lower rates by a quarter of a point or even more.

As a consequence, there will likely be more delinquencies and foreclosures, which, besides causing pain for those homeowners, will result in more homes on the market, thereby depressing their prices.

In turn, this will affect other homeowners -- even those with fixed rate mortgages and who and are current with their payments. They will likely be unable to use their homes as ATMs, tapping the equity to supplement their incomes.

They can't turn to savings, either, since, collectively, the nation's homeowners have been spending more than they have been earning for the past two years. The last time this happened was at the bottom of the Great Depression.

This alone is why consumers are reducing their outlays on all kinds of goods and services -- luxuries and necessities alike. Indeed, you know there's a problem out there when Starbucks (SBUX:Starbucks Corp SBUX 22.91, +0.04, +0.2%) reports a decline in traffic in response to -- among other reasons -- a 9 cent hike in the price of a cup of coffee.

Another reason why the Fed alone will not be able to ameliorate this crisis is that its main jurisdiction is over the banks -- and the problem is now centered in the financial markets. This is because the banks no longer have these loans on their books, having turned them into securities and sold them to others.

In turn, these mortgage-backed securities were used as collateral for the issuance of debt, whose value, as you know, is far lower than originally thought.

This has caused massive write downs by holders of these securities, cutting into their profits -- but, more important, depleting confidence in the financial system.

And this reduction in confidence is spreading beyond the financial markets and residential real estate to commercial real estate as well.

To the extent the banks are involved (by holding on to some of these securities), their capital is being reduced and thus their ability to make new loans.

I need not remind you that the ability to borrow money is the lifeblood of not just business --but consumers, too.

Not surprisingly, the combination of lower real estate values and reduced availability of funding is beginning to reduce business spending on new plants and equipment. This is overwhelming the positive effect that the lower-valued dollar is having on our exports.

So while the Fed is preoccupied with communications and forecasting, the financial markets remain frozen while the economy is melting down.

Talk about fiddling while Rome burns.

Irwin Kellner is chief economist for MarketWatch and for North Fork Bank.