The Federal Reserve could use proposed new regulatory powers to try to stop credit and asset market excesses from reaching the point where they threaten economic stability, the US Treasury said on Tuesday.
David Nason, assistant secretary for financial institutions, said the Fed could even use its proposed “macro-prudential” authority to order banks, hedge funds and other entities to curtail strategies that put financial stability at risk.
Efforts to aid beleaguered borrowers are still falling short as 70 percent of homeowners who are two months behind on their mortgages still aren’t getting help, a new report released Tuesday found.Of those borrowers receiving help, only one in three completed a workout within 45 days. Slow assistance is partly why the number of homeowners facing foreclosure increased 16 percent, the State Foreclosure Prevention Working Group found in its survey of mortgage servicers.
The report, which examined delinquent loans from October to January, criticized the limited results of the Hope Now Alliance — a coalition of mortgage lenders and servicers backed by the Bush administration. The rate at which homeowners are getting help was unchanged from the group’s last report.
Set tougher penalties for fraudulent brokers and lenders. Create a fund — partly paid for by “increased penalties on lenders who act irresponsibly” — to help people avoid foreclosures.
Require better disclosure from lenders. Create a standardized scoring system to quantify the borrower’s obligation.
Work to eliminate law “that prevents bankruptcy courts from modifying an individual’s mortgage payments.”
My Commentary: This is a real proposal. It is concrete and realistic.
Create “greater transparency in the lending process.”
Says any federal assistance for borrowers “must be temporary” and “should be focused solely on homeowners, not people who bought houses for speculative purposes, to rent or as second homes.”
Adopt policies to ensure that homeowners “provide a responsible down payment of equity at the initial purchase of a home.” Opposes reducing the down payment requirement for Federal Housing Administration mortgages; believes the requirement should be increased “as conditions allow."
Gov. Tim Pawlenty won't speak out against a massive coal-burning power plant on Minnesota's western border, despite a request from one of the nation's most prominent and controversial climate scientists.
A top housing official said Thursday that the Bush administration "strongly opposes" Democrats' housing rescue package, calling it a bailout that would expose taxpayers to excessive risk.Deputy Secretary of Housing and Urban Development Roy A. Bernardi also indicated that President Bush would veto a bill sending $15 billion to states for the purchase and rehabilitation of foreclosed properties.
The comments, in separate letters to lawmakers, were the most forceful rejection yet by the Bush administration of Democrats' housing aid plans. And they were the clearest indication to date that the White House intends to put up a vigorous fight against a bill to let the Federal Housing Administration take on as much as $300 billion in new mortgages for financially strapped homeowners.
They came as the House Financial Services Committee began work on the bill by Rep. Barney Frank, D-Mass., the panel chairman. It would substantially relax the FHA's standards to reach struggling borrowers who otherwise would be considered ineligible for a government-backed mortgage.
Homeowners would have to show they could make payments on a refinanced mortgage, and lenders would have to agree to take hefty losses on the existing loans.
"We're not talking here about murderers or muggers or arsonists. We're talking about people whose misdeeds were to try too hard to find housing for their family," Frank said. "What we hope to do today is to diminish the cascade of foreclosures."
The number of California homes lost to foreclosure in the first quarter surged 327% from year-ago levels -- reaching an average of more than 500 foreclosures per day -- DataQuick said in a report, warning that the widening foreclosure problem could "spread beyond the current categories of dicey mortgages, and into mainstream home loans."From DataQuick's report on California foreclosures in the first three months of 2008: "Trustees Deeds recorded, or the actual loss of a home to foreclosure, totaled 47,171 during the first quarter. ... Last quarter's total rose 48.9 percent from 31,676 in the previous quarter, and jumped 327.6 percent from 11,032 in first quarter 2007." That translates into 517 foreclosures every day in the first quarter of 2008.
An ubiquitous chemical found in hard plastic water bottles, DVDs, CDs and hundreds of other common items came under increased pressure Friday when Canada said it's potentially harmful and may ban its use in baby bottles.Health Canada made the announcement shortly after a U.S. company said it would stop selling hard-plastic Nalgene water bottles made with bisphenol A because of growing consumer concern over whether the chemical poses a health risk.
Merrill knows the pain firsthand. On Thursday Merrill announced a total write-down of $9.7 billion, including $3.1 billion of write-downs that were not included in the bank’s income statement. The write-downs are on top of $25 billion taken in the second half of last year, and there could be more to come.
Merrill also said that it would lay off an additional 2,900 people, on top of the 1,100 jobs already eliminated this year. The bank lost $1.96 billion, or $2.20 a share, in the first three months, a sharp contrast to a profit of $2.10 billion during the period a year ago. Revenue, including interest and dividends, was $2.9 billion — down 69 percent from a year ago.
The ultimate risk on mortgages is held by mortgage-backed securities holders, private mortgage insurers, and pool-level bond insurers. These parties have been entirely absent from the conversation on modification and bankruptcy reform.Instead, we have been hearing servicers and originators (such as the Mortgage Bankers Association) speaking for the entire mortgage lending industry. But there is strong evidence that servicers are themselves part of the problem and that some may be faithless agents to the MBS holders they represent.
If Congress is concerned about the impact of foreclosure legislation on the mortgage lending industry, it should make sure that the conversation includes parties who bear the ultimate risk in mortgage loans--the private mortgage insurers and the bond insurers and the major pension plans and mutual funds that hold MBS. For that matter, the state regulators of insurers should also be involved in this as a safety-and-soundness issue. Limiting mortgage loan losses limits the insurers losses.
There seems to be little disagreement that foreclosure would result in a larger loss on a mortgage than a modification. One would think, then, that the market would respond by modifying non-performing mortgages to a level that homeowners could afford. But this hasn't been happening on a large scale. As we think about why this market isn't working, securitization structures should get a lot of attention.
As Katie noted, securitization structures can create impediments to modification. Sometimes it is contractual, such as pooling and servicing agreements (PSAs) that forbid servicers from modifying mortgages or severely constrain the modifications that are allowed. Other times the PSAs create incentive structures that lead servicers to prefer foreclosure to modification.
A Chef? Really? A Chef?He pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down. He issued a rule that was criticized by law enforcement authorities because it could increase the difficulty of detecting and proving mortgage fraud.
As Jackson leaves office this week, much of the attention on his tenure has been focused on investigations into whether his agency directed housing contracts to his friends and political allies. But critics say an equally significant legacy of his four years as the nation's top housing officer was gross inattention to the looming housing crisis.
They contend that Jackson ignored warnings from within his agency, the Department of Housing and Urban Development, whose inspector general told Congress that some of the secretary's efforts were "ill-advised policy" and likely to put more families at risk of losing their homes.
During Jackson's years on the job, foreclosures for loans insured by HUD's Federal Housing Administration (FHA) have risen and default rates have hit a record high.
All the while, Jackson enjoyed a chef and a full-time security detail that trailed him to Washington social events. His office launched a new $7 million auditorium and cafeteria at HUD's headquarters, money that some within the agency believed should have been directed toward housing for the poor. His office solicited an emergency bid to obtain oil portraits of Jackson and four other HUD secretaries at a cost to taxpayers of $100,000.
Sallie Mae, the country's largest student lender, announced yesterday that it will start charging students who apply for federally backed loans and cut the type of loans available, citing the turmoil in the credit markets as a reason for this shift.
The Reston company said in a letter to schools and universities that it would immediately stop offering loans that consolidate debt accumulated by undergraduate and graduate students.
This has traditionally represented a major part of Sallie Mae's business. The firm said it would instead concentrate solely on lending to current students.
Starting next month, Sallie Mae will charge fees -- ranging from $35 for freshmen to a few hundred dollars for graduate students -- to apply for federal loans. These fees had largely been covered by lenders in the past, but most firms are now dropping this benefit.
When a property is in the foreclosure process, a mortgagor may request a hearing to reduce the redemption period. This is often based on a claim that the property has been abandoned.
A new law signed by Gov. Tim Pawlenty states that a defendant’s failure to appear at the hearing is “conclusive evidence” that the property has been abandoned.
Because of the recent increase in foreclosures, vacant homes have become a problem for some neighborhoods. Rep. Debra Hilstrom (DFL-Brooklyn Center) said the law is an attempt to work with the cities so that abandoned buildings do not become public safety issues. Hilstrom and Sen. Linda Higgins (DFL-Mpls) sponsor the law.
The law was also the result of work completed by a Vacancy Working Group convened last summer to discuss the sharp increase in vacancies and abandonments, and the impact on municipalities.
Signed into law April 4, 2008, it is effective immediately.
The increased activity comes as other kinds of acquirers have been sidelined by the credit crisis. These funds are state-sponsored investment vehicles and have combined assets of $2 trillion. With that much dry powder, sovereign funds dwarf the formerly booming private equity industry and in some cases, compete directly with it.
The Government of Singapore Investment Corporation has been the most active among the world’s sovereign funds, making its deputy chairman, Tony Tan, a major center of gravity. Wall Street veterans always follow the money, so many of the big-name advisers in New York and London have found themselves traveling the globe playing international matchmaker to these funds.
The suit, filed by the office of City Attorney Dennis Herrera late last month in San Francisco Superior Court, alleges that National Arbitration Forum, one of the nation's biggest dispute resolution companies, is biased in favor of debt collectors. It says the forum "is actually in the business of operating an arbitration mill, churning out arbitration awards in favor of debt collectors and against California consumers."
Herrera's office is asking the court to prohibit unfair business practices in arbitrations and to make defendants pay court costs and undetermined civil penalties.
The bigger problem is that the now-finished boom was, for most Americans, nothing of the sort. In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less — about $60,500.
This has never happened before, at least not for as long as the government has been keeping records. In every other expansion since World War II, the buying power of most American families grew while the economy did. You can think of this as the most basic test of an economy’s health: does it produce ever-rising living standards for its citizens?
In the second half of the 20th century, the United States passed the test in a way that arguably no other country ever has. It became, as the cliché goes, the richest country on earth. Now, though, most families aren’t getting any richer.
“We have had expansions before where the bottom end didn’t do well,” said Lawrence F. Katz, a Harvard economist who studies the job market. “But we’ve never had an expansion in which the middle of income distribution had no wage growth.”
Several months ago, when I was a scarcely tolerated guest blogger, I wrote a post that asked (What Determines) What's In Your Wallet? The point was to highlight how little we know about what determines what credit card offers a particular individual receives. I suggested that there was a danger of red-lining in the credit card industry based at least on what solicitations one received. (I got a bunch of indignant e-mails about this emphasizing that federal law prohibits discriminatory lending...as if no one ever violated the law. Ah, Camelot.)
Well, now comes an empirical study from Ethan Cohen-Cole, an economist at the Boston Federal Reserve that indicates that there is redlining in the credit card industry. Residents of black neighborhoods are less likely to receive less consumer credit than residents of white neighborhoods, all things being equal:
This paper’s principal observation is that remarkably, in spite of identical scores and identical community characteristics, our individual in the Black neighborhood receives less consumer credit (e.g. fewer credit cards) than the individual in the White area. That is, in spite of the fact that both have been assessed to have similar risks of nonpayment, as determined by the credit score, the person living in the Black area has less ability to access credit.And if there is less available credit card credit, where do people in black neighborhoods turn for credit?
To be sure, a single empirical study is just that and one can quibble about methodology, but wow! Talk about opening up a new front in credit card regulation. I've got to think that if this study gets some attention it is going to cause Congress to ask some questions. Of course, the study says nothing about the terms of the credit, but if I had to take a guess...well, what would you think?
The study includes a number of appropriate caveats about its findings. It also notes that
given the degree of regulatory scrutiny over the credit decision itself, one suspects that if any disparity exists in the provision of credit, it likely originates in the pre-screening (marketing) efforts.I'm less sure of this. Certainly the marketing is a big factor; there are certain cards that are specifically marketed at particular minority communities, e.g., the Freedom Card (not to be confused with the Chase Freedom Card), which is marketed to poor blacks in Philadelphia. Moreover, the study can only speak to aggregate levels of credit, not to individual issuers' lending solicitation and lending decisions.
Q. In your 12-step prediction, you estimated total financial losses from subprime lending, credit cards and auto loans at $1 trillion. Has your view changed after Bear Stearns?
A. The losses that we're facing at this point — $1 trillion — is the floor, not the ceiling. Losses might be much bigger than that. Even if you believe subprime losses might be in the order of $300 billion to $400 billion, more losses are going to be derived from commercial real estate, credit cards, auto loans, student loans and leverage loans, as well as from corporate defaults and losses from city assets.
Eventually the monolines will be downgraded, which means we'll see another round of write-downs on the things that they insured.
Q. Where are home prices going?
A. Two years ago, I predicted home prices would fall cumulatively 20%, but now I believe it will be at least 30%.
With a 20% fall in home prices, about 16 million households are under water. They have negative equity, which means the value of their homes is below the value of their mortgages. With a 30% drop in prices, you have 21 million households that are in negative equity. And since the mortgages are no-recourse loans, essentially they can walk away.
Even if only half of the 16 million households were to walk away, that alone could lead to losses for the financial system of $1 trillion. Even a 20% drop in home values may imply losses of $1 trillion that are not priced into the market today. So that's the floor. Again, it could be higher — as much as $2 trillion — if prices fall 30% and more people walk.
Q. You are predicting problems in commercial real estate, which we haven't seen yet. When do you expect the crisis to hit?
A. The same kind of reckless lending practices that occurred in subprime also occurred in commercial real estate — things like really high loan-to-value ratios and inflated estimations of how much rent would increase. If you look at the CMBX index (which tracks bonds backed by real estate loans), the spreads imply a huge number of defaults on existing commercial real estate loans. More important, the market for new commercial real estate loans is totally frozen, like the one for subprime new originations.
Q. But when will this happen?
A. That shoe has not dropped yet. But I expect the severe recession in residential housing will lead to a severe recession in commercial real estate. The reason is simple: If you go west, you have entire ghost towns outside of Phoenix, Las Vegas and throughout California. Who is going to be building new shopping centers, shopping malls, offices and stores where you have ghost towns? Also, there has been a lot of commercial real estate activity in the last couple of years, including a huge increase in retail capacity at a time of consumer-led recession. So, I expect [a commercial real estate] collapse will occur in the next few quarters.
Q. How bad will things get?
A. I would argue this is the worst financial crisis the U.S. has had since the Great Depression. We haven't seen this type of real financial turmoil for the last 70 years. Of course, it's not going to be as bad as the Great Depression. But this isn't your typical run-of-the-mill recession that in the last two episodes lasted only eight months with a minor contraction in output. This is going to last at least 12 months and more likely 18 months, which is something we haven't seen in decades.
This recent attack by the Chamber is in response to Public Citizen’s detailed report issued last fall which found that arbitrators employed by the National Arbitration Forum ruled against consumers in 94.7 percent of the 19,000 cases involving credit card holders.
In a broad and patently misleading claim the Chamber asserts, "The sweeping legislation pending in Congress would effectively eliminate arbitration, leaving many employees and consumers with little recourse,” said Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform (ILR). Of course, the legislation does nothing of the sort. It simply prevents business and employers from forcing arbitration on unsuspecting customers and employees who don’t know they “agreed” to it all, or agreed only because it was a condition of having a job, getting necessary medical care, buying a car, opening a bank account, getting a credit card, and the like. Oftentimes, because of the deliberately fine print used, consumers are not even aware that they have given up their rights.
In a feeble effort to bolster their attack, the Chamber commissioned a survey! Should we be surprised that the Chamber’s poll found “that 71 percent of likely voters oppose efforts by Congress to remove arbitration agreements from consumer contracts, and 82 percent prefer arbitration to litigation as a means to settle a serious dispute with a company?” Surveys paid for by special interest groups are notorious for coming up with the result desired by those paying the bills.
The survey’s main finding is beside the point because the legislation does not “remove arbitration agreements from consumer contracts,” it simply forbids business, before any dispute arises, from imposing an agreement to arbitrate as a condition of doing business or employment. In fact, the purpose of the legislation is to insure that when a dispute arises, both parties will have a choice on the best way to resolve their dispute. We assume that in many cases the parties will agree arbitration is the best way to resolve their dispute. They will be free to make that choice. On the other hand, if they prefer legal action, they will have that right. The legislation simply provides that the business or employer cannot foreclose the option of going to court by inserting arbitration as the only method of dispute resolution in the fine print of the agreement before any dispute ever arises.
Today, many consumer and employment contracts contain provisions mandating the consumer or employee to resolve any future conflicts by arbitration rather than filing a lawsuit. This has become the norm in cell phone, credit card contracts and investment broker agreements. Historically, arbitration was intended to resolve disputes between businesses, in which each side was knowledgeable and had relatively equal sophistication and bargaining positions. However, a series of Supreme Court decisions has changed the meaning of the law so that it now extends to disputes between parties of greatly disparate economic power, such as consumer disputes and employment disputes. As a result, a large and rapidly growing number of corporations are requiring millions of consumers and employees to give up their right to have disputes resolved by a judge or jury, and instead submit their claims to binding arbitration.
The result, unfortunately, is that the method of arbitration chosen by business often disfavors the consumer or employee and there is little or no transparency, because the claims are resolved without public scrutiny or meaningful judicial review. The purpose of Arbitration Fairness Act is to provide the consumer and employee with a real voice over the means by which disputes will be resolved. The legislation levels the playing field and says that when a dispute occurs both parties will have a say in how it will be resolved. Undoubtedly, if the method of arbitration offered by business is fair, inexpensive and rapid, many will elect to proceed via that route, however if it appears that the system is tilted to favor the business, the consumer would be free to choose a judge or jury to resolve the dispute.
If the Chamber had asked its poll participants whether they would like to have a voice in how their dispute will be resolved, we are confident the answer would have been an overwhelming yes. In fact, that is so clear that a survey would not be necessary at all.
The bill, which is expected to go to the Senate floor on Thursday, includes a new standard property tax deduction of $1,000 for couples and $500 for individuals that will benefit 28.3 million tax filers who do not itemize deductions on their annual returns.
The bill also includes $10 billion in tax-exempt bonds for local housing agencies to refinance subprime loans and provide new mortgages for first-time home buyers, $4 billion in grants for local governments to buy foreclosed properties and $100 million to expand counseling for homeowners at risk of defaulting on their loans.
In addition, it would give a $7,000 tax credit to purchasers of foreclosed homes and would provide a new tax break for struggling home builders, allowing them to claim current losses against taxes paid in earlier, more profitable years.
Firm Writedown Credit Loss(a) Total
UBS 38 38
Merrill Lynch 25.1 25.1
Citigroup 21.4 2.5 23.9
HSBC 3 9.4 12.4
Morgan Stanley 11.7 11.7
IKB Deutsche 9 9
Bank of America 7.3 0.9 8.2
Deutsche Bank 7.4 7.4
Credit Agricole 6.5 6.5
Credit Suisse 6.3 6.3
Washington Mutual 0.3 5.5 5.8
JPMorgan Chase 2.9 2.1 5
Wachovia 2.9 2 4.9
Canadian Imperial (CIBC) 4 4
Societe Generale 3.8 3.8
Mizuho Financial Group 3.4 3.4
Lehman Brothers 3.3 3.3
Barclays 3.2 3.2
Royal Bank of Scotland 3.1 3.1
Goldman Sachs 3 3
Dresdner 2.7 2.7
Bear Stearns 2.6 2.6
ABN Amro 2.4 2.4
Fortis 2.3 2.3
Natixis 1.9 1.9
HSH Nordbank 1.7 1.7
Wells Fargo 0.3 1.4 1.7
BNP Paribas 1.3 0.3 1.6
DZ Bank 1.5 1.5
National City 0.4 1 1.4
Bank of China 1.3 1.3
Bayerische Landesbank 1.3 1.3
Caisse d'Epargne 1.3 1.3
LB Baden-Wuerttemberg 1.3 1.3
Nomura Holdings 1 1
Sumitomo Mitsui 1 1
Gulf International 1 1
European banks not 8.4 8.4
listed above (b)
Asian banks not 4 0.7 4.7
listed above (c)
Canadian banks 2.4 0.1 2.5
excluding CIBC (d)
____ _____ _____
TOTALS* 206 25.8 231.8
