4 mortgage giants on the ropes
At the same time as the biggest banks are repaying their government loans, four giant mortgage backers remain on government life support. American International Group, Fannie Mae, Freddie Mac, and GMAC, are not only unable to repay the government, they are still in need of infusions. They appear at risk of getting onto a debt merry-go-round, where they have to draw new money from the government just to keep up with their existing government debts. Fannie Mae recently warned, for example, that it could not pay the dividends it owes the Treasury, so “future dividend payments will be effectively funded with equity drawn from the Treasury.”
Both Fannie Mae and Freddie Mac, which buy and resell mortgages, have used $112 billion — including $15 billion for Fannie in November — of a total $400 billion pledge from the Treasury. Now officials are discussing the possibility of increasing that commitment, possibly to $400 billion for each company, by year-end, after which the Treasury would need Congressional approval to extend it. Company and government officials declined to comment. Together, the four have been offered nearly $600 billion, and that lifeline could climb to nearly $1 trillion if the commitment to Fannie and Freddie is doubled, as some predict. What’s more, the companies seem short on persuasive strategies for extricating themselves from the government’s embrace.
Unemployment climbs
Initial claims for state unemployment benefits climbed 7,000 to a seasonally adjusted 480,000 in the week ended Dec. 12 from a slightly downwardly revised 473,000 in the prior week, the Labor Department said. It was the second straight week initial claims rose. Analysts polled by Reuters had forecast claims falling to 465,000 from a previously reported 474,000. The four-week moving average for new claims fell 5,250 to 467,500 last week, the lowest level since September 2008, and dropping for the 15th week in a row. The four-week moving average is viewed as a better gauge of underlying trends as it irons out week-to-week volatility.
According to analysts, the four-week moving average needs to drop below 450,000 to indicate labor market stability. The number of workers still collecting benefits after an initial week of aid rose 5,000 to 5.19 million in the week ended Dec. 5. This was above market expectations for 5.15 million. So-called continuing claims are below their peak of 6.9 million in June. The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, was unchanged at 3.9 percent in the week ended Dec. 5.
No second collapse?
According to a report from Radar Logic, delinquencies have reached their highest peak in decades and the most bearish observers believe the inventory will flood the market once the government programs end, boosting supply and decreasing home prices. But Radar Logic analysts side with those like Rick Sharga of RealtyTrac in saying that banks will slowly burn through the shadow inventory, releasing them gradually onto the market. “Thanks to federal bailout money and a general improvement in their financial health, banks have been relieved of the urgent need to liquidate their assets.
As a result, lenders and government entities like Fannie Mae and the FDIC have been able to curtail sales to raise prices and avoid recording losses on properties,” according to the report. If the government and the banks can effectively solve the puzzle of mitigating foreclosures, Radar Logic says that home values could even go up in 2010. Of course, before calling an end to the recession, everyone will keep an eye on unemployment. Many believe the rates will peak in the next two or three quarters and decline. Once that happens, according to the report, housing demand with strengthen even more. “While we are not out of the woods yet, our view is that housing is showing signs of stability, markets are showing signs of rational behavior and everyone is starting to understand the fundamental problems that brought us here,” according to the report. “As such, we think the bears are overdoing it.”
Here comes more spending
By a vote of 217 to 212, the U.S. House of Representatives approved $155 billion additional spending for "shovel-ready" construction projects and money to avoid layoffs of teachers, police and other public employees. No Republicans voted for the bill, and 38 Democrats voted against it. Leftover money from the government's $700 billion bank-bailout fund would cover $75 billion of the bill's price tag. Though the recession has eased its grip, the economy is still shedding jobs and voter anxiety remains high, and frankly Obama hopes to bring down the 10 percent unemployment rate before the November 2010 congressional elections, because he is losing popularity fast with Americans. A little bit cynical? You bet. The bill would provide $48.3 billion for infrastructure projects that promise to get workers back on job sites by April. Highway construction projects would get $27.5 billion, while subway, bus and other transit systems would get $8.4 billion. As in the earlier stimu lus bill, steel and other products used in these projects would have to come from the United States. "This is nothing short of a taxpayer-funded Christmas shopping tree financed by our friends, the Chinese," said Representative Jerry Lewis, the top Republican on the House Appropriations Committee.
Walking away from the mortgage
A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what is known as a "strategic default," walking away from their mortgages because they believe it is in their best financial interests. A standard mortgage-loan document reads, "I promise to pay" the amount borrowed plus interest, and some people say that promise should remain good even if it is no longer convenient. George Brenkert, a professor of business ethics at Georgetown University (my alama mater and the best school in the nation), says borrowers who can pay -- and weren't deceived by the lender about the nature of the loan -- have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments. A foreclosure stays on a consumer's credit record for seven years and can send a credit score (based on a scale of 300 to 850) plunging by as much as 160 points, accordin g to Fair Isaac Corp., which provides tools for analyzing credit records. A lower credit score means auto and other loans are likely to come with much higher interest rates, and credit card issuers may charge more interest or refuse to issue a card.
In addition, many states give lenders varying degrees of scope to seize bank deposits, cars or other assets of people who default on mortgages. Even so, in neighborhoods with high concentrations of foreclosures, "it's going to be really difficult to prevent a cascade effect" as one strategic default emboldens others to take that drastic step, says Paola Sapienza, a professor of finance at Northwestern University. A study by researchers at Northwestern and the University of Chicago found that as many as one in four defaults may be strategic.. Driving this phenomenon is the rising number of households that are deeply "under water," owing much more than the current value of their homes. First American CoreLogic, a real-estate information company, estimates that 5.3 million U.S. households have mortgage balances at least 20% higher than their homes' value, and 2.2 million of those households are at least 50% under water. The problem is concentrated in Arizona, California, Flori da, Michigan and Nevada.
The great heist
Just as Russia dropped another bombshell Climategate revelation (the Russian Institute of Economic Analysis (IEA) issued a report claiming that the Hadley Center for Climate Change based at the headquarters of the British Meteorological Office in Devon, England had cherry picked only 25% of the warmest readings from Siberia, wildly inflating warming in the models), U.S. Secretary of State Hillary Clinton proposed that major economies including the U.S. come up with $100 billion a year over the next decade for developing nations to fight climate change, an eleventh hour effort to break an impasse here on climate-change talks. Naturally some African nations that would benefit from the additional funding were thrilled, but a spokesman for the Chinese delegation said: "At first glance, we don't see the U.S has made much progress in its commitments." The Copenhagen summit of more than 190 nations, once seen as yielding a legally-binding accord among nations to limit their emissi ons, has been punctured by mistrust among countries and is now at risk of not even producing a non-binding resolution. Poor countries have blocked efforts by the Danish hosts to draft a negotiating text, fearing it will be tilted in favor of rich nations and skimp on assistance to them.
Foreclosure backlog at 1.7 million
About 1.7 million homeowners were on the verge of foreclosure in the fall, a looming "shadow inventory" of homes that will be put up for sale in the coming years and weigh down prices, according to a report from First American CoreLogic. The number, up from 1.1 million a year earlier, is likely to keep rising through the middle of next year or later, said Mark Fleming, chief economist of CoreLogic. The foreclosure backlog isaAlready equal to nearly half the 3.8 million unsold new and existing homes currently on the market, First American said. "We're going to be dealing with high levels of distressed (sales) in the marketplace for at least a couple of years," Fleming said. "It's not just all going to disappear." Other reports have come up with larger estimates.
But FirstAmerican assumes that fewer delinquent borrowers — only about one-third — will wind up losing their homes. It also estimates that nearly 30 percent of bank-owned properties have already been listed for sale. In many markets around the country, the number of new foreclosures has dropped in recent months as homeowners are reviewed for loan modification programs. But real estate agents, who have seen this as an encouraging sign, still fear that an onslaught is coming. "We've been in recovery mode for most of the year. How many foreclosures do they have to dump on the market to affect that? I don't know," Deborah Farmer, owner of StarLight Realty in Tampa, Fla. "Any house priced under $225,000 will be affected by a large increase in foreclosures in this market."
Mortgage rates increase
Freddie Mac said the average rate for a 30-year fixed-rate mortgage (FRM) was 4.94% with an average 0.7 point for the week ending December 17, up from 4.81% last week. A year ago, the 30-year FRM was 5.19%. Freddie Mac’s survey has put the rate for 30-year FRMs below 5% for the past seven weeks, creating a boost in refinance activity. Bankrate.com put the 30-year FRM at 5.13% with an average 0.42 point for the same period, up from 5.04% in the previous week. “Mortgage rates followed bond yields higher once again this week amid signs of an improving economy,” said Frank Nothaft, Freddie Mac vice president and chief economist. “On the consumer side, retail sales jumped 1.3% in November and consumer sentiment, as measured by the University of Michigan, rose above the market consensus forecast to the highest reading since September. Industrial production also showed large gains in November.
Freddie said the 15-year FRM averaged 4.38% with an average 0.6 point, up from last week when it was 4.32%. A year ago, it was 4.92%. Bankrate.com put the 15-year FRM rate at 4.53%. The five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.37% with an average 0.6 point this week, up from last week when it averaged 4.26%, Freddie said. The one-year Treasury-indexed ARM averaged 4.34% this week with an average 0.5 point, up from last week when it averaged 4.24%. Bankrate.com put the five-year ARM at 4.6%, up from 4.55% last week.
Sales forecasts down
Procrastination has been the rule so far this year and ShopperTrak now expects the full Super Saturday weekend to be this season's blockbuster. That distinction has often gone to the Black Friday weekend that comes on the heels of U.S. Thanksgiving Day and marks the official start of the holiday shopping season. But holiday sales forecasts have narrowed over the course of the shopping season to a range of down 1 percent to up 1 percent from 2008, when holiday sales fell for the first time since the National Retail Federation started tracking the data.
Many industry experts doubt whether "Super Saturday" -- the last before Christmas -- will generate enough business to push overall holiday sales above the dismal tally from last year, when the global economy was in free fall, shoppers were panicked about their savings and jobs, and retailers were forced to dump excess merchandise at rock-bottom prices. "I don't think sales are going to be that great, but that's what everyone was expecting," Riley said. Retailers are nudging online shoppers with reminders that they should get their orders in on or before Saturday, so that packages will arrive in time for Christmas.
Mortgage debt decreasing
According to the Mortgage Bankers Association (MBA) analysis of the Federal Reserve Board Flow of Funds data, the $3.43 trillion in commercial/multifamily mortgage debt outstanding recorded by the Federal Reserve was a decrease of $28 billion or 0.8 percent from the second quarter 2009. Multifamily mortgage debt outstanding dropped to $912 billion, a decrease of $1 billion or 0.1 percent from second quarter. “Given its longer-term nature, the amount of commercial and multifamily mortgages outstanding has remained relatively stable through the credit crunch and recession,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “The top line numbers from the Fed show a 0.8 percent decline in commercial and multifamily mortgage debt outstanding during the third quarter, led by a $20 billion drop in the holdings of banks and thrifts. Excluding construction loans, however, banks and thrifts saw a $6 billion increase in their holdings of loans bac
ked by commercial and multifamily properties.”
Commercial banks continue to hold the largest share of commercial/multifamily mortgages, $1.53 trillion, or 45 percent of the total. CMBS, CDO and other ABS issuers are the second largest holders of commercial/multifamily mortgages, holding $709 billion, or 21 percent of the total. Life insurance companies hold $310 billion, or 9 percent of the total, and savings institutions hold $190 billion, or 6 percent of the total. The GSEs, agency-backed mortgage pools and GSE-backed mortgage pools, including Fannie Mae, Freddie Mac and Ginnie Mae, hold $197 billion in multifamily loans that support the mortgage-backed securities they issued and an additional $162 billion in "whole" loans in their own portfolios. This represents a total share of 10 percent of outstanding commercial/multifamily mortgages.
Citigroup to suspend mortgages
Citigroup said Thursday it will suspend home foreclosures nationwide for 30 days, allowing homeowners to remain in their homes for the holiday season to make it "less stressful." Citigroup, which itself is struggling to pay back state aid and emerge from a massive taxpayer-funded bailout, said its units CitiMorgage and CitiFinancial would suspend foreclosures on Citi-owned mortgages through January 17. "We hope that with this suspension we can make the holidays a little less stressful for our customers who are going through a very difficult time," Sanjiv Das, president and chief executive of CitiMortgage, said in a statement.
The holiday foreclosure suspension affects only those loans owned by Citi, approximately 20 percent of the company's 746 billion dollar mortgage servicing and lending portfolio, the bank said. During the same 30-day period, evictions on real estate-owned properties will cease, it added. Citi said the national suspension will affect approximately 2,000 borrowers scheduled to have foreclosure sales and another 2,000 that were to receive foreclosure notifications in the next 30 days.
Only 4% get help under foreclosure prevention
According to the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision, nearly 80% of all loan modifications resulted in lower payments in the second quarter (the latest figures available) -- up from just over 50% three months earlier. When loans are made affordable, borrowers are less likely to default. The trouble is that only about 4% of troubled borrowers have received long-term help under the Obama administration's foreclosure prevention program. The report, the first comprehensive tally of permanent modifications made, shows that loan servicers have converted 31,382 people from trial adjustments to long-term assistance as of Nov. 30. But 30,650 people in trial modifications have been denied, according to Treasury officials. The dearth of permanent modifications has fueled concerns that the $75 billion plan will fall far short of its goal to help up to 4 million delinquent homeowners. The number of troubled borrowers currently in tria l modifications rose to 697,026, up from 650,994, a month earlier. "Our focus now is on working with servicers, borrowers and organizations to get as many of those eligible homeowners as possible into permanent modifications," said Phyllis Caldwell, chief of Treasury's Homeownership Preservation Office.
Consumer prices flat in November
The Labor Department said its Consumer Price Index rose 0.4 percent on a seasonally adjusted basis after an unrevised 0.3 percent gain in October. A 4.1 percent hike in the energy index led the rise, as gasoline, electricity, fuel oil, and natural gas prices rose. Prices rose 1.8 percent over the last 12 months, as expected, the first year-over-year gain since February. Core prices rose 1.7 percent over the 12-month period. Prices rose 1.8 percent over the last 12 months, as expected, the first year-over-year gain since February. Core prices rose 1.7 percent over the 12-month period. Separately, the U.S. current account deficit widened as expected in the third quarter to $108 billion, largely driven by a big trade shortfall, a Commerce Department report showed on Wednesday. The deficit rose from a downwardly revised $98 billion in the second quarter and was in line with analysts' forecasts for a third quarter shortfall of $108 billion. The third-quarter deficit equaled 3
percent of gross domestic product, up from 2.8 percent in the April-June period, a Commerce Department official said.
Foreclosures fall -- for now
According to RealtyTrac, foreclosure filings fell by 8% in November, making it the fourth consecutive month of improvement in the housing market. There were 306,627 filings last month, a decline that follows a 3% drop in October, 4% in September and 1% in August. "Loan modifications and other foreclosure prevention efforts, along with the recently extended and expanded homebuyer tax credit, are keeping a lid on the most visible symptoms of the nation's ailing housing market -- foreclosures and home value depreciation," RealtyTrac CEO James Saccacio said in a prepared statement. However, while there are signs of improvement, the industry has yet to turn around: Foreclosure filings were still 18% above November 2008's levels.
RealtyTrac spokesman Rick Sharga isn't convinced the decline is a natural outgrowth of improved market conditions. "I really don't believe we're looking at a trend that suggests the problem is going away," he said. "Much of the drop was artificially induced." RealtyTrac reported 76,701 homes were repossessed during the month, only a tad down from the 77,077 lost in October. For the year, there have been a total of 777,630 properties taken back by banks. The "sand states" -- Nevada, Florida, California and Arizona -- continued to amass the largest numbers of foreclosure filings with Nevada the hardest hit state of all. One of every 119 households had a filing in November, nearly four times the national average of one for every 417. Florida had one for every 165 households, California one for every 180, and Arizona one for every 186.
MBA -- Mortgage Applications Increase Slightly
The Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending December 11, 2009 increased 0.3 percent on a seasonally adjusted basis from one week earlier, and decreased 0.3 percent on an unadjusted basis compared with the previous week. The Refinance Index increased 0.9 percent from the previous week and the seasonally adjusted Purchase Index decreased 0.1 percent from one week earlier. The unadjusted Purchase Index decreased 3.6 percent compared with the previous week and was 15.4 percent lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 1.5 percent.
The four week moving average is up 4.2 percent for the seasonally adjusted Purchase Index, while this average is up 0.8 percent for the Refinance Index. The refinance share of mortgage activity increased to 75.2 percent of total applications from 74.4 percent the previous week. This is the highest refinance share observed in the survey since the week ending April 24, 2009. The adjustable-rate mortgage (ARM) share of activity decreased to 4.1 percent from 4.7 percent of total applications from the previous week, which is the lowest share since mid-June 2009. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.92 percent from 4.88 percent, with points decreasing to 1.08 from 1.17 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
Housing starts lower than expected
The Commerce Department said housing starts increased 8.9 percent to a seasonally adjusted annual rate of 574,000 units -- but were lower than expected in November as construction activity for single family dwellings increased only marginally, a government report showed on Wednesday. Analysts polled by Reuters had expected housing starts to rise to 580,000 units. However, the percentage increase last month was the largest since May, indicating housing remained on a steady recovery path October's housing starts were revised downwards to 527,000 units from the previously reported 529,000 units. Compared to the same period a year-ago, housing starts were down 12.4 percent, but way off the 54.9 percent decline seen in January. Applications for new building permits were also up, rising 6 percent to an annual rate of 584,000 units, a stronger showing than economists predicted.
Interest rates to stay low?
The Federal Reserve is expected to leave interest rates at a record low this week. The big question is whether Chairman Ben Bernanke and his colleagues will hint about when they will reverse course and start boosting rates. The Fed is expected to announce its policy decisions on Wednesday afternoon and experts don't think it's likely to raise rates for the foreseeable future, perhaps not until 2011. Last week, Bernanke warned that the economy confronts "formidable headwinds." They include a weak job market, cautious consumers and tight credit. Against that backdrop, the Fed is all but certain to keep the target range for its bank lending rate at zero to 0.25 percent, where it's stood since last December. The Fed also is likely to retain a pledge first made in March to hold rates at such levels for "an extended period." Economists say they think the chairman and many other policymakers are willing to wait too long to raise rates than risk hiking too soon. "I think they'll l eave the taps open as long as possible, until they're absolutely certain the economy is back on track," said Anthony Michael, head of fixed income for asset manager Aberdeen's Singapore office.
In recent statements issued after policy-making meetings, the Fed keeps cautioning that it expects economic conditions "likely to warrant exceptionally low levels of the federal funds rate for an extended period." The central bank also isn't expected to make any major changes to a program, set to expire in March, to help further drive down mortgage rates. "The economy isn't on solid footing yet," said Chris Rupkey, an economist at the Bank of Tokyo-Mitsubishi. "So it's best for the Fed to keep with the script of low interest rates."
Stimulus to wind down in 2010
According to a BBVA Compass analyst, the Federal Reserve is likely to execute its exit strategy for winding down the period of extraordinarily low interest rates used to stabilize the economy as early as the summer of 2010. “In Q409, it is clear that the worst of the recession has passed; the economy expanded in the third quarter, ?nancial conditions are stabilizing, residential investment grew for the ?rst time since 2005, consumer spending is picking up and business inventories are more in line with sales,” BBVA research department’s chief US economist Nathaniel Karp wrote in a fourth quarter outlook report. Industry players surveyed eight weeks ago expected the Fed’s low interest rates to rise as early as February 2010. A survey conducted within the past two weeks showed now rates aren’t expected to rise until June 2010, Karp said in a conference call Monday. Inflation pressures will remain low “in the foreseeable future,” enabling the Fed to keep interest rates low. “Given the slack in the economy, the Fed is expected to gradually wind down the monetary stimulus. The strategy is anticipated to focus ?rst on the withdrawal of quantitative easing and then on raising rates,” Karp wrote.
In residential real estate, low prices, attractive mortgage rates and the extension of the homebuyers’ tax credit will support demand, which will prompt more construction, Karp wrote, adding that commercial real estate (CRE) will continue to suffer from a lack of available credit. The strains in commercial real estate are larger in office space and “milder” in apartments.
PPI up
The PPI index put out by the Commerce Department shows U.S. wholesale prices rose nearly twice than expected in November, while conditions for New York manufacturers deteriorated in December, following four months of improvement. The producer price index for finished goods leapt 1.8% on a seasonally adjusted basis in November. Economists surveyed by Dow Jones Newswires had expected prices would climb by 1.0%. Core PPI, which excludes volatile food and energy prices, rose 0.5% in November, more than double the 0.2% rise economists surveyed by Dow Jones Newswires had expected. The Labor Department said gasoline prices rose 14.2 percent month, eclipsing a sharp moderation in food price increases. Separately, the Federal Reserve Bank of New York's Empire Manufacturing Survey showed its general business conditions index fell by about 21 points to 2.55 from 23.51 in November. Its indexes for new orders, shipments and employment all fell, with the index for employment moving into
negative territory.
The New York Fed's "Empire State" general business conditions index fell 2.55 in December from 23.51 in November. This was the biggest monthly decline on record and the lowest reading since July 2009 when it was at minus 0.55. The index has risen from a record low of minus 22.23 in March. The reports come as the Federal Reserve is set to begin deliberations on interest rate policy. Ahead of the meeting, the dollar was moving higher Tuesday morning against both the euro and the yen, while Treasurys fell. Crude-oil futures moved lower, though gold futures rose. The action comes after U.S. stocks rose Monday, pushing the Dow to a new 2009 closing high as Abu Dhabi's $10 billion loan to Dubai and Exxon Mobil's $31 billion acquisition of XTO Energy boosted sentiment.
Demand for building materials low
Moody’s Investors Service says The demand for building materials will continue to be low in 2010, resulting in reduced pricing power and profitability for most of next year. Demand for cement, aggregates and ready-mixed concrete will continue to decline, hurting revenue and cash flow for materials industry companies. The decline in demand will come primarily from nonresidential construction, which is projected to decline nearly 9% said Moody’s senior vice president Glenn Eckert. Although the falloff in nonresidential construction could start to let up in 2011, the recovery in building-materials shipments will be slow and painful, he added. However, public construction and infrastructure projects, primarily those funded by government stimulus programs will be a boost for the materials industry. After four years of steep declines, residential construction will enter a period of weak but stabilizing activity. “Foreclosures and high unemployment will weigh on demand for newly built homes, suppressing any substantial up tick in demand for building materials from this sector for much of next year,” Eckert said.
HAMP servicers grow to 88
The number of servicers participating in the Home Affordable Modification Program (HAMP) grew to 88, according to the latest report from the US Treasury Department. Under HAMP, the Treasury allocates capped incentives for the modification of loans on the verge of foreclosure. Currently, the 88 servicers could receive a potential $27.4bn in capped incentives, but the details of the program make room for $50bn. Of the newcomers, Phoenix-based Marix Servicing earns the highest cap at $20.3m. The Idaho Housing and Financing Association, based in Boise, receives a $9.4m in capped incentives. In third place is the Golden 1 Credit Union, based in Sacramento, earning $6.1m in capped incentives. Fidelity Homestead Savings Bank, based in New Orleans, receives $2.9m in capped incentives. Based out of Spokane, Wash., Sterling Savings Bank earned a $2.2m cap. Silver State Schools Credit Union, out of Las Vegas, received a $1.8m cap. American Eagle Federal Credit Union, based in East H artford, Conn., can receive $1.5m in incentives. First Keystone Bank from Media, Penn. receives up to $1.2m in incentives. Community Bank & Trust Company from Clarks Summit, Penn. received $380,000 in incentives. Spirit of Alaska Credit Union, based in Fairbanks, received $360,000. And both Home Financing Center in Coral Gables, Fla. and Bay Gulf Credit Union of Tampa earned $230,000.
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