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Hotel Loan Defaults Double In Second Quarter

“Luxury hotel boom: denver and colorado’s mountain resorts build to suit upper-upper upscale occupants.”

-ColoradoBIZ, July 1, 2006

“The stage is set for Nashville hotel boom as indicators favor expansion”

-Nashville Business Journal, January 19, 2007

“In Las Vegas, Too Many Hotels Are Never Enough”

-New York Times, April 24, 2007

“NYC Hotel Boom Could Help Ease Room Shortage”

-CBS 2 (New York City), December 16, 2007

“Tulsa enjoys hotel boom”

-The Journal Record (Oklahoma City), January 2, 2008

From Bloomberg’s Nadja Brandt and Dan Levy today:

As many as one in five U.S. hotel loans may default through 2010 as the recession means companies are spending less on travel and perks, according to University of California economist Kenneth Rosen.

The value of hotel properties in default or foreclosure almost doubled to $17.3 billion in the second quarter through June 24 from $9 billion at the end of the first quarter, data compiled by Real Capital Analytics Inc. show. The New York-based research firm, which began tracking distressed commercial property in November, expects hotel defaults to increase by as much as $2 billion this quarter, said analyst Jessica Ruderman.

“Hotels without question will have the highest foreclosure rate of any commercial real estate sector,” said Rosen, who runs a real estate hedge fund with $310 million in assets and is chairman of the University of California’s Fisher Center for Real Estate and Urban Economics in Berkeley.

Hotel owners are defaulting as room rates and property values tumble and the securitized mortgage market that fueled an 88 percent gain in U.S. commercial prices from 2001 to late 2008 is dormant.

Luxury hotel revenue fell 28 percent in April from a year earlier and has dropped for 12 straight months, according to Smith Travel Research Inc. in Hendersonville, Tennessee. The 29 percent decline in March was the biggest since October 2001.

A third of the $8.6 billion in securities backed by hotel loans due in 2010 are at risk of defaulting, data compiled by credit-rating firm Realpoint LLC in Horsham, Pennsylvania, show.

Guerrilla marketing?

Source:

“Hotel Loan Defaults Double as Recession Cuts Travel (Update2)”
Nadja Brandt, Dan Levy
Bloomberg, July 1, 2009

Barney Frank: Lower Lending Standards For Condo Buyers?

“There’s no trick to being a humorist when you have the whole government working for you”

-Will Rogers (American entertainer. 1879-1935)

Some people never learn. From the Wall Street Journal on Wednesday:

Back when the housing mania was taking off, Massachusetts Congressman Barney Frank famously said he wanted Fannie Mae and Freddie Mac to “roll the dice” in the name of affordable housing. That didn’t turn out so well, but Mr. Frank has since only accumulated more power. And now he is returning to the scene of the calamity — with your money. He and New York Representative Anthony Weiner have sent a letter to the heads of Fannie and Freddie exhorting them to lower lending standards for condo buyers.

You read that right. After two years of telling us how lax lending standards drove up the market and led to loans that should never have been made, Mr. Frank wants Fannie and Freddie to take more risk in condo developments with high percentages of unsold units, high delinquency rates or high concentrations of ownership within the development.

Fannie and Freddie have restricted loans to condo buyers in these situations because they represent a red flag that the developments — many of which were planned and built at the height of the housing bubble — may face financial trouble down the road. But never mind all that. Messrs. Frank and Weiner think, in all their wisdom and years of experience underwriting mortgages, that the new rules “may be too onerous.”

Rep. Barney Frank, June 27, 2005: No Housing Bubble
YouTube Video Link

Source:

“Barney the Underwriter”
Wall Street Journal, June 24, 2009

Congress Scrutinized For Potential Conflicts-Of-Interest

Washington lawmakers are receiving more attention these days for possible conflicts-of-interest relating to the taxpayer bailouts and the proposed health care system overhaul. From the Washington Post’s Paul Kane and Carol D. Leonnig last week:

Top House lawmakers had considerable holdings in major financial institutions that took billions of dollars in taxpayer bailouts at the end of last year, according to annual financial disclosure reports released yesterday.

From stock holdings to retirement funds to mortgages, more than 20 House leaders and members of the House Financial Services Committee had large personal stakes in the Wall Street powerhouses whose collapse last year led to an unprecedented government intervention in the marketplace. In some instances those lawmakers, like millions of other investors, sold their holdings at steep losses while others retained the stocks at greatly diminished value.

House Speaker Nancy Pelosi (D-Calif.) and her husband lost hundreds of thousands of dollars investing in American International Group, which has received $170 billion in government loans and cash injections, making it by far the largest recipient of federal bailout dollars. Republican Whip Eric Cantor (R-Va.) and his wife held stock, retirement plans and other investments worth at least $183,000 and as much as $495,000 in firms benefiting from federal government rescue efforts, including Goldman Sachs and Morgan Stanley.

At least 18 members of the House Financial Services Committee — which oversees the banking and housing industries at the core of the economic meltdown — held stock last year in firms that received federal bailout assistance, according to a review of the forms that were available yesterday.

As President Obama pushes his universal health care program, more potential conflicts-of-interest involving lawmakers have surfaced. From the Associated Press’ Larry Margasak and Sharon Theimer last Friday:

Influential senators working to overhaul the nation’s health care system have investments and family ties with some of the biggest names in the industry. The wife of Sen. Chris Dodd, the lawmaker in charge of writing the Senate’s bill, sits on the boards of four health care companies.

Members of both parties have industry connections, including Democrats Jay Rockefeller and Tom Harkin, in addition to Dodd, and Republicans Tom Coburn, Judd Gregg, John Kyl and Orrin Hatch, financial reports showed Friday.

Jackie Clegg Dodd, wife of the Connecticut Democrat, is on the boards of Javelin Pharmaceuticals Inc., Cardiome Pharma Corp., Brookdale Senior Living and Pear Tree Pharmaceuticals…

Other publicly available documents show Mrs. Dodd last year was one of the most highly compensated non-employee members of the Javelin Pharmaceuticals Inc. board, on which she has served since 2004. She earned $32,000 in fees and $109,587 in stock option awards last year, according to the company’s SEC filings.

Mrs. Dodd earned $79,063 in fees from Cardiome in its last fiscal year, while Brookdale Senior Living gave her $122,231 in stock awards in 2008, their SEC filings show. She earned no income from her post as a director for Pear Tree Pharmaceuticals but holds up to $15,000 in stock in Pear Tree, which describes itself as a development-stage pharmaceutical company focused on the needs of aging women.

Sources:

“Lawmakers Invested in Bailed-Out Firms”
Paul Kane, Carol D. Leonnig
Washington Post, June 11, 2009

“Key health care senators have industry ties”
Larry Margasak, Sharon Theimer
Associated Press, June 12, 2009

Foreign Investors Growing Tired Of American Assets?

The month of April saw waning demand for American assets by overseas investors. From Bloomberg’s Vincent Del Giudice this morning:

International purchases of American financial assets grew more slowly in April as China, Japan and Russia pared demand for Treasuries, underscoring the danger of U.S. reliance on foreigners to finance its fiscal deficit.

Total net purchases of long-term equities, notes and bonds rose a net $11.2 billion, compared with buying of $55.4 billion in March, the Treasury said today in Washington. International holdings of Treasuries increased a net $41.9 billion, compared with the $55.3 billion gain in March. Including bills, the holdings fell a net $2.6 billion…

Including short-term securities such as stock swaps, foreigners sold a net $53.2 billion of U.S. financial assets, compared with net buying of $25 billion the previous month…

Foreign investments in U.S. agency debt slumped for the eighth time in 10 months, by $2.5 billion in April. Net purchases of American equities slowed to $4.6 billion in April from $13.2 billion the prior month. Holdings of corporate bonds tumbled a net $9.7 billion, the biggest decline since November.

China, the largest holder of U.S. Treasury securities, cut back their holdings to $763.5 billion in April from $767.9 billion in March. Japan, the second largest holder of Treasuries, reduced theirs to $685.9 billion from $686.7 billion a month earlier. China’s holdings of Treasuries represent about 10% of America’s publicly-held debt.

Bloomberg’s Del Giudice noted:

Waning demand for Treasuries may exacerbate a jump in yields that threatens to make it harder for the U.S. to pull out of its deepest recession in at least half a century. Yields on benchmark 10-year notes have climbed more than 1 percentage point since mid-March, contributing to an increase in mortgage rates that’s counteracting Fed efforts to aid the housing market.

Source:

“International Demand for U.S. Assets Slowed in April (Update3)”
Vincent Del Giudice
Bloomberg, June 15, 2009

Personal Wealth Declines By $1.3 Trillion In First Quarter

In case you hadn’t already heard…

From Associated Press economics writer Jeannine Aversa yesterday:

The brute force of the recession earlier this year turned back the clock on Americans’ personal wealth to 2004 and wiped out a staggering $1.3 trillion as home values shrank and investments withered.

Net worth, or the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards, declined 2.6 percent in the first three months of the year, the Federal Reserve said Thursday…

While the first quarter was ugly, the hit to Americans’ net worth was worse late last year. In the October-December period, it fell a record 8.6 percent, according to revised figures. That was the largest drop on record dating to 1951.

If Americans continue to spend — no guarantee — Fed Chairman Ben Bernanke and other economists say they think the recession will end late this year. But if shoppers hunker down and cut spending again, that could delay any recovery. Late last year, Americans cut spending at the fastest rate in 28 years.

Some economists believe thrift may be the norm for a while. Aversa added:

Even if things improve, such a dramatic evaporation of wealth will probably make Americans more thrifty down the road, said Scott Hoyt, senior director of consumer economics at Moody’s Economy.com.

“The bulk of consumers alive today have not experienced declines in wealth like this,” Hoyt said. “They are already turning thrifty, and it will stay that way beyond the short term. This has been a significant learning experience.”

Should this be the case, it would not bode well for the U.S. economy, where it is suggested consumer spending accounts for 70% of the nation’s economic activity.

Source:

“1st quarter wiped out $1.3 trillion for Americans”
Jeannine Aversa
Associated Press, June 11, 2009

Boom2Bust Turns Two Years Old

Memorial Day Weekend 2007. Sure seems like yesterday….

Friday, May 25, 2007.

The Dow Jones Industrial Average closed out the week at 13,507.28. The S&P 500 index finished up at 1,515.73.

The median house price is $222,700, according to the National Association of Realtors.

Family net worth is at an all-time high of $64.36 trillion for the quarter.

The number of unemployed persons is 6.8 million and the unemployment rate is 4.5 percent.

Total public debt outstanding in the United States is $8.8 trillion.

Talk of the “Goldilocks economy” rules the day, and Washington and Wall Street are in “don’t worry, be happy” mode.

Federal Reserve chairman Ben Bernanke doesn’t believe the nation will slip into a recession, and he rejects the notion raised by his predecessor, Alan Greenspan, that the economy’s expansion could be in danger of fizzling out…

The Fed chief testified on Capitol Hill amid growing concerns that problems with risky mortgages and a painful housing slump could send the economy into a tailspin. Greenspan recently said there’s a one-in-three possibility of a recession this year.

But Bernanke — while acknowledging there are risks — told Congress’s Joint Economic Committee that the Fed does not see such negative forces pushing the economy into a recession.

“I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end,” Bernanke said. “I don’t think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long.”

-Associated Press, March 29, 2007

…a new SUV in every McMansion’s garage

Fast forward to today…

The Dow Jones Industrial Average closed at 8,473.49. The S&P 500 index finished up at 910.33.

The median house price in the first quarter of 2009 is now $169,000, according to the National Association of Realtors.

Banks and businesses worldwide have lost $1.47 trillion in write-downs and credit losses in the past 22 months stemming from the collapse of the subprime-mortgage market.

Household net worth dropped a record 9 percent in the fourth quarter of 2008, pushing total net worth down to $51.48 trillion. It was the sixth straight quarterly decline from the peak of $64.4 trillion in the second quarter of 2007. Also, the drop in net worth in the fourth quarter of 2008 was the largest drop in dollar terms on record, going back to 1951, when the U.S. government began keeping quarterly records. The 9 percent drop was also the largest drop as a percentage change on record.

In April (the last month data is available for), the number of unemployed Americans reached 13.7 million persons and the unemployment rate was 8.9 percent. According to the Bureau of Labor Statistics, 5.7 million jobs have been lost since the recession began in December 2007.

The total public debt outstanding in the United States is now $11.3 trillion. Furthermore, as Bloomberg’s Mark Pittman and Bob Ivry pointed out on March 31:

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Goldilocks made a fine meal for the bears.

But I’m convinced our fuzzy friends still want more.

Thank you all for reading and contributing comments to Boom2Bust.com, and for inspiring me to post about some of the financial research I come across on a daily basis.

Personally, I think that while we may get out of this recession soon enough, I fear all the additional obligations accrued since 2007 will only have made the house of cards that is the U.S. financial system weaker, thereby setting ourselves up for more pain when the eventual crash comes.

You can only kick the can down the road for so long before you have to call it a day.

Year three, here we come!

Christopher E. Hill
Editor

Fannie Mae, Freddie Mac Face ‘Critical’ Financial Problems

For regular Boom2Bust.com readers, the following piece about mortgage giants Fannie Mae and Freddie Mac isn’t really news. From CNN Money’s Tami Luhby this past Monday:

Fannie Mae and Freddie Mac, charged with helping lead the nation out of its housing crisis, are facing “critical” financial problems, federal regulators said Monday.

The companies suffer from severe financial, operational and compliance weaknesses, the Federal Housing Finance Agency said a report to Congress detailing its annual examinations of the firms. Taken over by the government in September, Fannie and Freddie are not able to operate without federal assistance.

“With new senior management teams, each enterprise has made strides in remediating problems,” the agency said. “But they still face numerous significant challenges including building and retaining staff and correcting operational and credit management weaknesses that led to conservatorship.”

Luhby pointed out that while the two mortgage companies are considered essential to a housing market and larger economic recovery, their balance sheets are hemorrhaging, requiring them to use taxpayer funds to stay afloat. From the piece:

Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) play a vital role in the national housing market, accounting for a combined share of 73% of mortgage originations in the second half of 2008. They also serve central roles in the Obama administration’s foreclosure prevention plan.

To continue functioning, the firms have drawn down about $60 billion of their combined $400 billion lifeline from the federal government. Fannie reported a $23.2 billion quarterly loss and Freddie a $9.9 billion quarterly loss earlier this month.

Source:

“Fannie and Freddie in ‘critical’ condition”
Tami Luhby
CNN Money, May 18, 2009

Freddie Mac Bailout: $51 Billion And Counting

“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis… The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

-Congressman Barney Frank (D-MA), September 11, 2003

From the Washington Post’s Zachary Goldfarb this morning:

Freddie Mac yesterday reported that it lost $10 billion in the first three months of the year, as investments in mortgages continued to fall in value at the federally run housing finance giant.

The disclosure automatically prompts a $6 billion investment from the Treasury Department to keep the company solvent, bringing Freddie Mac’s bailout total to $51 billion in the first nine months of its government rescue…

Last week, Fannie Mae reported that it lost $23.2 billion in the first three months of the year as mortgage defaults increasingly spread from risky loans to the far-larger portfolio of loans to borrowers who have been considered safe. The loss brought District-based Fannie Mae’s total bailout to $34 billion.

Freddie Mac’s $10 billion loss compares with a $149 million loss in the same quarter last year. It was far smaller than the fourth-quarter loss, which was $24 billion.

The federal government has pledged $200 billion to offset losses at each mortgage giant. In the years of the housing boom, Freddie Mac, even more than its counterpart Fannie Mae, moved swiftly into buying mortgage investments created out of pools of loans made to people with weak credit histories or no proof of income or employment.

Source:

“Freddie Mac Loses $10 Billion for Quarter”
Zachary A. Goldfarb
Washington Post, May 13, 2009

Fannie Mae: Please Sir, I Want $19 Billion More

Oh, Fannie Mae. What a wreck you are.

The Wall Street Journal’s Peter Wallison wrote last September:

The most astonishing thing about Treasury Secretary Henry Paulson’s plan for Fannie Mae and Freddie Mac is that he intends to use taxpayer funds to resuscitate the companies and return them to profitability.

This after 20 years, during which Fannie and Freddie used government backing to enrich their shareholders, managements, lobbyists, former government officials and Washington insiders; after they rigged the political process with campaign contributions; and after their Congressional supporters resisted every effort at reform until the two companies were on the verge of collapse. Now a Treasury secretary in a Republican administration aims to put them back in the same business, and get the taxpayers to finance it.

And financing it we are…

From the Associated Press this morning:

Fannie Mae says it needs $19 billion in additional government aid after posting a loss of $23.2 billion in the first quarter as the taxpayer bill from the housing market bust mounts.

The mortgage finance company, seized by federal regulators last September, posted a quarterly loss of $4.09 per share on Friday. That compares with a loss of $2.5 billion, or $2.57 a share, in the year-ago period.

The results were driven by $20.9 billion in credit losses due to declining housing market conditions and $5.7 billion in writedowns of the value of its mortgage-backed securities.

The request for federal aid is its second since the takeover. The company received about $15 billion earlier this year.

“Family Guy: Stewie In Oliver Twist”
YouTube Video Link

Sources:

“How Paulson Would Save Fannie Mae”
Peter J. Wallison
Wall Street Journal, September 12, 2008

“Fannie Mae Seeks $19 Billion in US Aid After Loss”
Associated Press, May 8, 2009

Zillow: 1 Out Of 5 Homeowners Underwater

Online real estate marketplace Zillow.com released a grim report earlier today concerning the state of the U.S. housing market. From Reuters staff this morning:

Home values in the United States extended their fall in the first quarter, with more than one in five homeowners now owing more on their mortgages than their homes are worth, real estate website Zillow.com said on Wednesday.

U.S. home values posted a year-over-year decline of 14.2 percent to a Zillow Home Value Index of $182,378, resulting in a total 21.8 percent drop since the market peaked in 2006, according to Zillow’s first-quarter Real Estate Market Reports, which encompass 161 metropolitan areas and cover the value changes in all homes, not just homes that have recently sold.

U.S. homes lost $704 billion in value during the first quarter and have depreciated $3.8 trillion in the past 12 months, according to analysis of the reports.

Declining home values left 21.9 percent of all American homeowners with negative equity by the end of the first quarter, Zillow said.

By comparison, 17.6 percent of all homeowners owed more on their mortgage than their property was worth in the fourth quarter of 2008, and 14.3 percent were underwater in the third quarter of last year, the reports showed.

Nine consecutive quarters of declines have left eight regions — including the Modesto, California, Stockton, California, and Fort Myers, Florida regions — with median value declines of more than 50 percent since those markets peaked.

Source:

“More than one in five homeowners underwater: Zillow”
Reuters, May 6, 2009

U.S. Housing Market On The Way To Recovery?

Is it possible that the gravely-ill housing market in the United States is actually starting to recover? Bloomberg’s Kathleen M. Howley wrote this afternoon:

U.S. home prices rose 0.7 percent in February from January, the first consecutive monthly gain in two years, a sign that low interest rates may be moderating declines in real estate values…

Mortgage rates have tumbled 1.6 percentage points in six months, making houses and condominiums more affordable. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 5.3 percent last week as Americans took advantage of interest rates near record lows. Home sales rose 5.1 percent in February from a month earlier, the National Association of Realtors said March 23…

The inventory of properties on the market fell to a 9.7 month supply in February at the current sales pace, down from April’s high of 11.3 months, and sales rose 5.1 percent from a month earlier, the Realtors group said.

The number of Americans signing contracts to buy previously owned homes rose 2.1 percent in February, led by a 14.5 percent jump in the Midwest and a 10.6 percent increase in the Northeast, the National Association of Realtors said in an April 1 report.

Despite all this recent good news, the patient might not be out of danger just yet. Howley added:

U.S. banks owned $11.5 billion of foreclosed homes in the fourth quarter, up from $6.7 billion a year earlier, according to the Federal Deposit Insurance Corp. in Washington. California and Florida metropolitan areas led the U.S. in foreclosures in the first quarter as unemployment and falling property values deepened the housing recession, according to RealtyTrac Inc., based in Irvine, California.

“Whatever damage has been done in California is only going to get worse because there is a glut of homes owned by lenders that aren’t yet on the market,” said Bruce Norris, a principal with the Norris Group, a Riverside, California-based real estate investment firm. “These homes are like a shadow inventory that is likely to drag down prices further when they come onto the market.”

Freddie Mac, along with larger rival, Washington-based Fannie Mae and banks including New York-based Citigroup Inc., have slowed or delayed foreclosures using various moratorium plans in the hopes that homeowners in default will be able to modify their loans.

And now, foreclosures are starting to accelerate. The New York Times’ David Leonhardt wrote Tuesday:

Fannie Mae, like many banks, is inundated with foreclosed properties. In recent weeks, banks have begun accelerating foreclosures again, after having held off while waiting to find out which homeowners would be eligible for the Obama administration’s assistance program.

Which could mean more falling prices ahead. Leonhardt added:

The glut of foreclosed homes creates a self-reinforcing cycle. Falling prices lead to more foreclosures. Foreclosures lead to an excess supply of homes for sale. The excess supply then leads to further price declines. Jan Hatzius, the chief economist at Goldman Sachs, says that the “massive amount of excess supply” means that home prices nationwide will probably fall an additional 15 percent.

This estimate hides a lot of variation, too. In Miami, Goldman forecasts, prices could drop an additional 33 percent, which is pretty amazing since they’ve already fallen 50 percent from their 2006 peak.

Nor is excess supply the only reason prices still have a way to fall. Nationwide, homes may not be overvalued by much. But in some cities, including New York, San Francisco, Los Angeles, Boston, Chicago and Miami, they remain very expensive. So while Mr. Hatzius and his Goldman colleagues are somewhat more pessimistic than most forecasters, the difference isn’t enormous.

Not only are foreclosures ramping up, but it appears they’re spilling out beyond the primary metropolitan areas into the secondary markets now as well. From the American Banker website today:

Foreclosure rates continued to climb in the first quarter in many parts of the country, casting doubt on the effectiveness of the Obama administration’s foreclosure prevention plan, a private foreclosure listing company said Wednesday.

“Industry efforts to date really haven’t put a dent yet in the wave of foreclosures,” said Rick Sharga, a senior vice president at RealtyTrac, an online foreclosure listing service that releases quarterly reports on foreclosure activity. “Despite the press reports we’ve had about the many hundreds of thousands of loans that have been modified or worked out or rearranged, the numbers have just kept going up.”

Sharga said that new municipalities had appeared on the map during the most recent period as areas with rising foreclosure rates, including Boise, Id., Fayetteville, Ark. and Charlotte.

“It appears we’re starting to see the problem spread beyond the primary metropolitan areas into the secondary markets,” he said, adding that while foreclosures in Detroit, Mich., were down, rates in Ann Arbor, Lansing and Grand Rapids had risen.

RealtyTrac is your destination for housing foreclosures.

Going back to the Times piece, David Leonhardt ended his article on a personal note and brushed aside any notions that the housing bust may be near a bottom. He concluded:

I’ll confess that this bearish picture isn’t exactly what I had hoped to find. A year ago, as part of a move from New York to Washington, my wife and I bought our first house. We did so fully expecting prices to continue falling (though perhaps not as much as they ultimately will, given the severity of the financial crisis). But we decided they had fallen enough for us to take the plunge. We preferred buying before the bottom of the market instead of renting and having to move again in a year or two.

Still, when I wrote about that decision last spring, I argued that anyone who didn’t have to move probably should not buy yet. Prices still had a way to fall.

They don’t have as far to fall today, but the great real estate crash is not over, either. So if you are part of the 30 percent of American households who rent and you’re trying to decide when to buy, relax.

The market is still coming your way.

Sources:

“Home Prices Gain 0.7% in February From January (Update1)”
Kathleen M. Howley
Bloomberg, April 22, 2009

“For Housing Crisis, the End Probably Isn’t Near”
David Leonhardt
New York Times, April 21, 2009

“RealtyTrac Sees Problems with Obama Mod Plan”
American Banker, April 22, 2009

Nobel Prize-Winning Economist Critical Of Government ‘Rescue’ Efforts

Curious to find out what a Nobel Prize-winning economist, whose work is cited in more economic papers than any of his peers, thinks of the federal government’s efforts in dealing with the financial crisis?

Bloomberg interviewed 2001 Nobel Prize winner Joseph Stiglitz yesterday on this topic. And frankly, he’s not too impressed. Bloomberg’s Matthew Benjamin and Michael McKee wrote:

The Obama administration’s bank rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

Ouch. “Not too impressed” might be an understatement.

Stiglitz attacked the “rescue” programs that have been put in place by the government. From Bloomberg:

TARP

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said…

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”

PPIP

The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, “is a really bad program,” Stiglitz said. It won’t accomplish the administration’s goal of establishing a price for illiquid assets clogging banks’ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses.

“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.

“We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”

$787B “Stimulus” Program

He called the $787 billion stimulus program necessary but “flawed” because too much spending comes after 2009, and because it devotes too much of the money to tax cuts “which aren’t likely to work very effectively.”

“It’s really a peculiar policy, I think,” he said.

$75B Mortgage Relief Program

The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.

The former head of the White House’s Council of Economic Advisers under President Bill Clinton took a few shots at the Federal Reserve as well. From the Bloomberg piece:

Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.

Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said.

“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long run solution. It’s a solution that says let’s kick the can down the road a little bit.”

While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”

The Columbia University professor made sure he touched on the Washington/Wall Street connection before concluding. Benjamin and McKee wrote:

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”

Source:

“Stiglitz Says White House Ties to Wall Street Doom Bank Rescue”
Matthew Benjamin, Michael McKee
Bloomberg, April 17, 2009

Fed Economists Question Mortgage Modifications

Last week, I pointed out a Washington Post piece discussing a recently-released U.S. government report which showed that even after having their mortgages modified, distressed borrowers were still defaulting in high numbers.

Friday afternoon, Bloomberg’s Scott Lanman talked about a paper by Federal Reserve economists and researchers that also increased doubts about the effectiveness of these modifications. Lanman wrote:

Policies aimed at easing home-loan terms for troubled borrowers may not be as effective in preventing foreclosures as more-direct aid to homeowners, Federal Reserve economists found.

Job losses and falling home prices have a bigger impact on delinquencies than mortgage terms, and modifications aren’t necessarily a better deal for investors than foreclosures, according to a paper by two current and one former economist at the Boston Fed Bank and one Atlanta Fed researcher.

The conclusion poses a challenge to housing advocates and to some extent the prevailing views of President Barack Obama’s administration, Fed officials and other U.S. regulators. Obama announced a $75 billion plan in February that concentrates on refinancing or modifying loans for as many as 9 million homeowners.

“One of the most influential strands of thought contends that the crisis can be attenuated by changing the terms of ‘unaffordable’ mortgages,” the economists said in the paper posted on the Boston Fed’s Web site today. Yet policies aimed at reducing a borrower’s debt-to-income ratio “face important hurdles in addressing the housing crisis,” the authors said.

Instead, the government should consider alternatives such as loans to homeowners to bridge the loss of income for one or two years caused by unemployment, or helping borrowers become renters, the economists said.

You can read the paper on the Boston Fed’s web site here.

Source:

“Fed Economists Say Mortgage Changes May Not Stem Foreclosures”
Scott Lanman
Bloomberg, April 13, 2009

Despite Modified Mortgages, High Default Rates Continue

Back on February 18, 2009, U.S. President Barack Obama said the following in a speech given at a Mesa, Arizona, high school:

Sub-prime loans — loans with high rates and complex terms that often conceal their costs — make up only 12 percent of all mortgages, but account for roughly half of all foreclosures.

Right now, when families with these mortgages seek to modify a loan to avoid this fate, they often find themselves navigating a maze of rules and regulations but rarely finding answers. Some sub-prime lenders are willing to renegotiate; many aren’t. Your ability to restructure your loan depends on where you live, the company that owns or manages your loan, or even the agent who happens to answer the phone on the day you call.

My plan establishes clear guidelines for the entire mortgage industry that will encourage lenders to modify mortgages on primary residences. Any institution that wishes to receive financial assistance from the government, and to modify home mortgages, will have to do so according to these guidelines — which will be in place two weeks from today.

For some time now I’d heard a good deal of rumbling about how such loan modifications probably won’t help a number of troubled “homeowners.” However, last week the Washington Post provided evidence in the form of a newly-released U.S. government report showing that even after having their mortgages modified, distressed borrowers were still defaulting in high numbers. Renae Merle wrote on April 3:

Troubled borrowers continue to default at high rates even on home loans that have been modified by lenders, according to a government report issued today. The report also found that an increasing number of borrowers default on their loans before making a single payment.

The report by the Office of Thrift Supervision and the Office of the Comptroller of the Currency, which regulate mortgage lenders, focuses on the effectiveness of industry efforts to help troubled borrowers. It finds that a growing number of homeowners are falling behind on their payments and that borrowers with prime mortgages, which traditionally are considered less risky, are a growing part of the problem.

“It’s higher than we have ever seen it, historically, and the fact that it is still climbing is something we are keeping an eye on,” said John C. Dugan, comptroller of the currency. The report covers two-thirds of the mortgage market.

Merle talked about the success of the loan modifications. From the piece:

It also finds that despite increasing government and industry efforts, many borrowers are quickly falling behind on their payments after receiving a modified loan, which can include lowering their interest rate or extending the length of their loans. Of the borrowers who had loans modified early last year, for example, about 35 percent had missed at least three payments nine months after their loan was modified.

About 57 percent had missed at least one payment. Most borrowers, about 58 percent, received loan modifications that did not lower their monthly payments. The more a borrower’s payment is lowered, the more likely he or she is to stay current on a loan, the report found.

The report also found that an increasing number of homeowners, about 1.44 percent during the fourth quarter of 2008, are falling behind before making a single payment on their mortgages. That is up from 1.23 percent in the first quarter.

“…about 1.44 percent during the fourth quarter of 2008, are falling behind before making a single payment on their mortgages.”

Wow. Did you ever think that some people just aren’t meant to be homeowners?

Source:

“Home Loan Defaults High Despite Modifications”
Renae Mearle
Washington Post, April 3, 2009