Anglonautes > English vocabulary / words > Economy > Housing market

CASA GRANDE, Ariz. — Fannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords.

Bill Bridwell, a real estate agent in the desert south of Phoenix, is among the thousands of agents hired nationwide by the companies to sell those foreclosures, recouping some of the money that borrowers failed to repay. In a good week, he sells 20 homes and Fannie sends another 20 listings his way.

“We’re all working for the government now,” said Mr. Bridwell on a recent sun-baked morning, steering a Hummer through subdivisions laid out like circuit boards on the desert floor.

For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage one hour from Phoenix. The Congressional Budget Office predicts that the final bill could reach $389 billion.

Fannie and Freddie increased American home ownership over the last half-century by persuading investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors.

Rather than actually making loans, the two companies — Fannie older and larger, Freddie created to provide competition — bought loans from banks and other originators, providing money for more lending and helping to hold down interest rates.

“Our business is the American dream of home ownership,” Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. Here in Arizona, during a housing boom fueled by cheap land, cheap money and population growth, Fannie Mae executives trumpeted that the company would invest $15 billion to help families buy homes.

As it turns out, Fannie and Freddie increasingly were channeling money into loans that borrowers could not afford. As defaults mounted, the companies quickly ran low on money to honor their guarantees. The federal government, fearing that investors would stop providing money for new loans, placed the companies in conservatorship and took a 79.9 percent ownership stake, adding its own guarantee that investors would be repaid.

The huge and continually rising cost of that decision has spurred national debate about federal subsidies for mortgage lending. Republicans want to sever ties with Fannie and Freddie once the crisis abates. The Obama administration and Congressional Democrats have insisted on postponing the argument until after the midterm elections.

In the meantime, Fannie and Freddie are, at public expense, removing owners who cannot afford their homes, reselling the houses at much lower prices and financing mortgage loans for the new owners.

The two companies together accounted for 17 percent of real estate sales in Arizona during the first four months of the year, almost three times their share of the market during the same period last year, according to an analysis by MDA DataQuick.

Valarie Ross, who lives in the Phoenix suburb of Avondale, has watched six of the nine homes visible from her lawn chair emptied by moving trucks during the last year. Four have been resold by the government. “One by one,” she said. “Just amazing.”

The population of Pinal County, where Mr. Bridwell lives and works, roughly doubled to 340,000 over the last decade. Developers built an entirely new city called Maricopa on land assembled from farmers. Buyers camped outside new developments, waiting to purchase homes. One builder laid out a 300-lot subdivision at the end of a three-mile dirt road and still managed to sell 30 of the homes.

Mr. Bridwell sold plenty of those houses during the boom, then cut workers as prices crashed. Now his firm, Golden Touch Realty, again employs as many people as at the height of the boom, all working exclusively for Fannie Mae. The payroll now includes a locksmith to secure foreclosed homes and two clerks devoted to federal paperwork.

Golden Touch gets more listings from Fannie Mae than any other firm in Pinal County. Mr. Bridwell said he was ready to jump because he remembered the last time the government ended up owning thousands of Arizona houses, after the late-1980s collapse of the savings and loan industry.

“The way I see it,” said Mr. Bridwell, whose glass-top desk displays membership cards from the Republican National Committee, “is that we’re getting these homes back into private hands.”

Selling a house generally costs the government about $10,000. The outsides are weeded and the insides are scrubbed. Stolen appliances are replaced, brackish pools are refilled. And until the properties are sold, they must be maintained. Fannie asks contractors to mow lawns twice a month during the summer, and pays them $80 each time. That’s a monthly grass bill of more than $10 million.

All told, the companies spent more than $1 billion on upkeep last year.

“We may be behind many loans on the same street, so we believe that it’s in everyone’s best interest to aggressively do property maintenance,” said Chris Bowden, the Freddie Mac executive in charge of foreclosure sales.

Prices have plunged. So by the time a home is resold, Fannie and Freddie on average recoup less than 60 percent of the money the borrower failed to repay, according to the companies’ financial filings. In Phoenix and other areas where prices have fallen sharply, the losses often are larger.

Foreclosures punch holes in neighborhoods, so residents, community groups and public officials are eager to see properties reoccupied. But there also is concern that investors are buying many foreclosures as rental properties, making it harder for neighborhoods to recover.

Real estate agents tend to favor investors because the sales close surely and quickly and there is the prospect of repeat business. But community advocates say that Fannie and Freddie have an obligation to sell houses to homeowners.

David Adame worked for Fannie Mae’s local office during the boom, on programs to make ownership more affordable. Now with prices down sharply, Mr. Adame sees a second chance to put people into homes they can afford.

“Yes, move inventory,” said Mr. Adame, now an executive focused on housing issues at Chicanos por la Causa, a Phoenix nonprofit group, “but if we just move inventory to investors, then what are we doing?”

Executives at both Fannie and Freddie say they have an overriding obligation to limit losses, but that they are taking steps to sell more homes to families.

Fannie Mae last summer announced that it would give people seeking homes a “first look” by not accepting offers from investors in the first 15 days that a property is on the market. It also offers to help buyers with closing costs, and prohibits buyers from reselling properties at a profit for 90 days, to discourage speculation. Fannie Mae said that 68.4 percent of buyers this year had certified that they would use the house as a primary residence.

Freddie Mac has adopted fewer programs, but it said it had sold about the same share of foreclosures to owner-occupants.

The companies also have agreed to sell foreclosed homes to nonprofits using grants from the federal Neighborhood Stabilization Program. Chicanos por la Causa, which won $137 million under the program in partnership with nonprofits in eight other states, plans to buy more than 200 homes in Phoenix in the next two years. It plans to renovate them to sell to local families.

The scale of such efforts is small. The home ownership rate in Phoenix continues to fall as foreclosures pile up and renters replace owners.

But John R. Smith, chief of Housing Our Communities, another Phoenix-area group using federal money to buy foreclosures, says he tries to focus on salvaging one property at a time.

“I tell them, ‘O.K., you want to unload 10 houses to that guy, fine,’ ” he said. “ ‘Now give me this one. And this one. And one over here.’ ”

Cost of Seizing Fannie and Freddie Surges for Taxpayers,
NYT,
19.6.2010,
https://www.nytimes.com/2010/06/20/
business/20foreclose.html

U.S. Mortgage Delinquencies

Reach a Record High

November 20, 2009

The New York Times

By DAVID STREITFELD

The economy and the stock market may be recovering from their swoon, but more homeowners than ever are having trouble making their monthly mortgage payments, according to figures released Thursday.

Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households.

The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.

Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.

“I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down,” said the housing consultant Ivy Zelman.

The overall third-quarter delinquency rate is the highest since the association began keeping records in 1972. It is up from about one in 14 mortgage holders in the third quarter of 2008.

The combined percentage of those in foreclosure as well as delinquent homeowners is 14.41 percent, or about one in seven mortgage holders. Mortgages with problems are concentrated in four states: California, Florida, Arizona and Nevada. One in four people with mortgages in Florida is behind in payments.

Some of the delinquent homeowners are scrambling and will eventually catch up on their payments. But many others will slide into foreclosure. The percentage of loans in foreclosure on Sept. 30 was 4.47 percent, up from 2.97 percent last year.

In the first stage of the housing collapse, defaults and foreclosures were driven by subprime loans. These loans had low introductory rates that quickly moved to a level that was beyond the borrower’s ability to pay, even if the homeowner was still employed.

As the subprime tide recedes, high-quality prime loans with fixed rates make up the largest share of new foreclosures. A third of the new foreclosures begun in the third quarter were this type of loan, traditionally considered the safest. But without jobs, borrowers usually cannot pay their mortgages.

“Clearly the results are being driven by changes in employment,” Jay Brinkmann, the association’s chief economist, said in a conference call with reporters.

In previous recessions, homeowners who lost their jobs could sell the house and move somewhere with better prospects, or at least a cheaper cost of living. This time around, many of the unemployed are finding that the value of their property is less than they owe. They are stuck.

“There will be a lot more distressed supply entering the market, and it will move up the food chain to middle- and higher-price homes,” said Joshua Shapiro, chief United States economist for MFR Inc.

Many analysts say they believe that foreclosures, instead of peaking with the unemployment rate as they traditionally do, will most likely be a lagging indicator in this recession. The mortgage bankers expect foreclosures to peak in 2011, well after unemployment is expected to have begun falling.

There was one sliver of good news in the survey: the percentage of loans in the very first stage of default — no more than 30 days past due — was down slightly from the second quarter. If that number continues to decline, at least the ranks of the defaulted will have peaked.

“It’s arguably a positive, but it doesn’t undermine the fact that there are still five or six million foreclosures in process,” Ms. Zelman said.

The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.

The mortgage group’s survey noted, however, that the F.H.A. was issuing so many loans — about a million in the last year — that it had the effect of masking the percentage of problem loans at the agency. Most loans enter default when they are older than a year.

When the association removed the new loans from its calculations, the percentage of F.H.A. mortgages entering foreclosure was 30 percent higher.

The association’s survey is based on a sample of more than 44 million mortgage loans serviced by mortgage companies, commercial and savings banks, credit unions and others. About 52 million homes have mortgages. There are 124 million year-round housing units in the country, according to the Census Bureau.

U.S. Mortgage Delinquencies Reach a Record High, NYT, 20.11.2009,
http://www.nytimes.com/2009/11/20/business/20mortgage.html

Editorial

Mortgages and Minorities

December 9, 2008
The New York Times

The mortgage crisis that has placed millions of Americans at risk of losing their homes has been especially devastating for black and Hispanic borrowers and their families. It seems clear at this point that minorities were more likely than whites to be steered into risky, high-priced loans — even when researchers controlled for such crucial factors as income, loan size and location.

The Congress that takes office in January can start to deal with this problem by strengthening fair-lending laws, especially the Community Reinvestment Act, which encourages fair, sound lending practices while requiring banks to lend, invest and open branches in low- and moderate-income areas.

Lawmakers should also extend that law to cover the often fly-by-night mortgage-lending companies that helped drive the subprime crisis. Those companies saddled entire neighborhoods with risky, high-priced loans that borrowers could never hope to pay back, sold those loans to Wall Street and then went out of business.

Congress needs to keep in mind that many of those players are surely to be back in operation somewhere down the line. Some already have returned in the guise of offering to help homeowners avoid foreclosure.

The need to revisit fair-lending law is evident in numerous studies of federal lending data. A particularly striking analysis in 2006 by the National Community Reinvestment Coalition found that nearly 55 percent of loans to African-Americans, 40 percent of loans to Hispanics and 35 percent of loans to American Indians fell into the high-cost category, as opposed to about 23 percent for whites. There also were troubling gender differences. Women got less-favorable terms than men.

A classic discrimination study by the reinvestment coalition found that black and Hispanic people who posed as borrowers received significantly worse treatment and were offered costlier, less-attractive loans more often than whites — even though minority testers had been given more attractive financial profiles, including better credit standings and employment tenures. That study, and others, go a long way to rebutting mortgage companies’ claims that lending patterns are explained by so-called risk characteristics like credit scores.

John Taylor, the coalition’s president, told a Congressional hearing last year, that minority borrowers were paying a “race tax.” While lenders are required to report to the federal government such things as race, gender, census tract, amount of loan and income, they omit credit score data. By guarding the single most important statistic used in making loans, the lenders have given themselves a ready shield against charges of discrimination.

But with indications of discrimination popping up everywhere, Congress has no choice but to require lenders to report on all data that form the basis of lending decisions, including data that would permit neutral third parties to determine whether lenders were discriminating by race. Ideally, lenders would have to report, not just on the borrower’s credit worthiness, but on details of the terms and conditions of the loan itself.

Looking back, it’s hard to say whether such reporting requirements would have forestalled the subprime crisis. Certainly, they would have given consumer advocates and regulators more information earlier on. There is no excuse for not putting them in place now to avoid the possibility of history repeating itself and having all those risky, high-priced loans issued and sold off as securities before anyone intervenes.

Mortgages and Minorities, NYT, 9.12.2008,
http://www.nytimes.com/2008/12/09/opinion/09tue1.html

Editorial

Return of the Predators

November 24, 2008
The New York Times

The demise of the subprime mortgage industry has been hard on predatory brokers, too. They feasted for years on bad loans until reality crashed down and the money ran out, and there they were: sharks without a frenzy.

Now they are circling again. Predators of every sort have regrouped and returned to their old ways, this time as loan-modification companies, inserting themselves between hard-strapped homeowners and banks, offering to work deals — for cash up front.

It’s a high-pressure, high-volume business, advertising in the usual low-rent ways: talk-radio ads, Web come-ons, fliers on car windshields. The ads are full of glossy promises, like this one for a Long Island outfit: “Reduce your mortgage rate to as low as 4%. No refinancing — no closing costs. Reduce your monthly payment. Foreclosures, late pays/bad credit okay.”

It’ll cost you — in this case, 1 percent of your outstanding loan, half of it in advance.

There’s often nothing illegal about this booming and largely unregulated business. Some shops are true scams, taking the money and running. But others are just immoral, profiting on fear and false hopes with expensive services that nonprofit organizations and government agencies offer for nothing.

Troubled homeowners know all about the relentlessness of the loan-rescue racket: it fills their mailboxes and sends salespeople to lurk on their doorsteps. Foreclosure filings are public records, and loan modifiers routinely swarm courthouses to find leads. Loan counselors at the Long Island Housing Partnership, a respected nonprofit in Hauppauge, N.Y., tell of scammers crashing its housing workshops, posing as troubled borrowers, then working the crowd with sales pitches.

And they do work hard. A call to one law firm’s toll-free number plugged on WABC radio quickly gets a call back with a hard sell. “We have a 100 percent success rate” in renegotiating loans, an operator sweetly vows, reluctant to say more until you tell her what your mortgage payment is and how far behind you are.

The painful truth is that nobody has a 100 percent success rate, and not every loan is fixable. Banks have recently made public commitments to putting more effort into working loans out. But homeowners need to realize that the best way to do that is directly with the lender or through a reputable nonprofit counselor.

The for-profit loan modifier’s cruelly deceptive sales pitch is that you get what you pay for. Nonprofit organizations, which work for no fee, say they can strike better deals, because they have longstanding relationships with lenders that storefront firms do not have.

But that doesn’t mean that well-meaning advocates are aggressive and effective in finding people who need help. The government, banks and nonprofit organizations need to be more creative and assertive to outmaneuver the predators — to send the competing message that hope doesn’t require thousands of dollars in cash up front, although it does mean facing up to hard truths about one’s finances and future.

Nonprofits frequently complain about how hard it is to get at-risk homeowners to ask for help. It’s true that people deep in debt are often embarrassed and wrapped in blankets of denial. They don’t open mail or reliably make appointments. But the good actors in this bad drama need to get better at working around that problem, before more good money is thrown after bad.

Return of the Predators, NYT, 24.11.2008,
http://www.nytimes.com/2008/11/24/opinion/24mon1.html

One in five homeowners

with mortgages underwater

Fri Oct 31, 2008
1:15pm EDT
Reuters
By Jonathan Stempel

NEW YORK (Reuters) - Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens, a report on Friday shows.

About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American CoreLogic.

The data, covering 43 states and Washington, D.C., includes borrowers nationwide, even those who took out mortgages before housing prices began to soar early this decade.

Seven hard-hit states -- Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio -- had 64 percent of all "underwater" borrowers, but just 41 percent of U.S. mortgages.

"This is very much a regional problem, and people tend to forget that," said David Wyss, chief economist at Standard & Poor's, who expects home prices nationwide to fall another 10 percent before bottoming late next year.

"Most of the country is not in bad shape," he continued. "Things seem to be stabilizing in Michigan, but the big bubble states -- Florida, California, Arizona and Nevada -- are still very overpriced."

About 68 percent of U.S. adults own their own homes, and about two-thirds of them have mortgages.

JPMorgan Chase & Co, one of the biggest mortgage lenders, on Friday offered to modify $70 billion of mortgages to keep a potential 400,000 homeowners out of foreclosure. Bank of America Corp, which bought Countrywide Financial Corp in July, also has a large loan modification program.

HOME PRICES, ECONOMY UNDER PRESSURE

U.S. home prices fell a record 16.6 percent in August from a year earlier, with declines in all 20 major metropolitan areas measured by the S&P/Case-Shiller Home Price Indices.

Foreclosure filings rose 71 percent in the third quarter to a record 765,558, according to RealtyTrac.

Meanwhile, the Commerce Department said gross domestic product fell at a 0.3 percent rate in the third quarter. Some experts expect the worst U.S. recession since the early 1980s.

Yet despite a series of expensive government programs to spur lending, mortgage rates are rising, making it tougher to borrow or refinance. The rate on a 30-year fixed-rate mortgage jumped this week to 6.46 percent from 6.04 percent a week earlier, Freddie Mac said.

Meanwhile, borrowing costs on hundreds of thousands of adjustable-rate mortgages are expected to reset higher in the coming months. The problem may be particularly serious for borrowers with rates tied to the London Interbank Offered Rate, or Libor, which is abnormally high relative to benchmark U.S. rates.

Last week, Wachovia Corp said borrowers with its "Pick-a-Pay" ARMs and living in or near Stockton and Merced, California, owed at least 55 percent more on their mortgages, on average, than their homes were worth. Wells Fargo & Co is buying Wachovia.

NEVADA HARD HIT, NEW YORK AT RISK

First American CoreLogic, an affiliate of title insurance and real estate services company First American Corp, said states with large numbers of homes with negative equity either had rapid price appreciation, many homes bought with subprime mortgages or as speculative investments, steep manufacturing declines, or a combination.

Nevada was hardest hit, where mortgage borrowers on average owed 89 percent of what their homes were worth, and 48 percent had negative equity. Michigan was second, with an 85 percent loan-to-value ratio and 39 percent of borrowers underwater.

New York fared best, with an average 48 percent loan-to-value ratio and just 4.4 percent of mortgage borrowers with negative equity.

But Wyss said this could change as financial market upheaval transforms Wall Street. This month, New York City Comptroller William Thompson estimated that the city alone might lose 165,000 jobs over two years.

"We're going to see home prices coming down pretty significantly in New York," Wyss said. "A lot of people are losing jobs, and won't be getting their usual bonuses, and that leaves less money for housing."

(Reporting by Jonathan Stempel;

Additional reporting by Al Yoon;

Editing by Brian Moss)

One in five homeowners with mortgages underwater, R, 31.10.2008,
http://www.reuters.com/article/newsOne/idUSTRE49S3Q520081031

Britain faces crisis

as negative equity

to reach 2 million

October 19, 2008
From The Sunday Times
Robert Watts
and Jonathan Oliver

Collapsing house prices are plunging 60,000 homeowners a month into negative equity, which means the country is on course for a worse crisis than the 1990s crash.

At current trends, 2m households will enter negative equity by 2010, outstripping the 1.8m affected at the bottom of the last housing slump.

New research from Standard & Poor’s, the ratings agency, coincides with evidence that banks are aggressively seizing homes whose owners have slipped just a few hundred pounds behind on their mortgage payments.

It is a further signal that the financial crisis is now infecting the real economy as hundreds of thousands of families face the prospect of being unable to move house because their home is worth less than the value of their mortgage.

Many more homeowners will now be afraid that the bank may suddenly repossess their property. Repossessions have soared to 19,000 in the first half of the year, up 40% on the previous six months. That figure is expected to rise to 26,000 in the second half of 2008.

Economists believe house prices will fall by up to 35% from their peak by 2010. This compares with a drop of only 20% in the early 1990s.

Last night opposition politicians blamed Labour for encouraging a “culture of indebtedness” that now threatens to cause an implosion in the housing market. Philip Hammond, the shadow Treasury chief secretary, said: “We are now paying the price for a decade of debt-fuelled boom, with hundreds of thousands of people unable to sell their property, after being encouraged by the government to overstretch themselves to get on the property ladder.”

Vince Cable, the Liberal Democrat finance spokesman, urged Gordon Brown to do more to prevent unnecessary repossessions. “It genuinely must be a lender’s last resort, which right now it certainly is not,” he said.

With official figures out this week expected to show Britain has fallen into recession, Brown is planning a 1930s-style programme of public works, spending billions on new schools, homes and transport projects. He has urged senior colleagues to increase expenditure on big capital projects – despite forecasts that tax revenues are about to collapse.

Brown’s ambitious plan is modelled on Franklin Roosevelt’s New Deal, which helped drag America out of the Great Depression. A Whitehall source said: “We cannot afford to risk the complete collapse of our construction industry. We have to make sure that the skills have not been lost when we finally pull out of the downturn.”

Standard & Poor’s has calculated that by the end of the month 335,000 homes will be worth less than their mortgages. The figure represents a rise of 260,000 in four months.

Capital Economics, the City consultancy, expects up to 2m properties will be in negative equity by 2010 — more than in the recession of the early 1990s.

Northern Rock, the bank nationalised this year, is said to be behind a wave of aggressive repossessions. In the nine months to the end of September, the state-owned lender made more than 2,000 seizures.

Esther Spick, from Surrey, is three months in arrears on her Northern Rock mortgage. The lender has launched repossession proceedings, even though she owes just £1,200. In one case reported to The Sunday Times by a housing charity, the bank is trying to seize a home where the owner is just £800 in arrears, even though he has about £40,000 of equity in the £180,000 property.

Chris Tapp, director of Credit Action, a debt charity, said: “What makes these negative equity statistics so worrying is that they come at a time when banks are behaving so unreasonably over repossessions.

“We are particularly dismayed with the inflexibility of Northern Rock. ”

Adam Sampson, chief executive of Shelter, the housing charity, said: “Northern Rock is behaving very aggressively on repossessions, but it is not the only lender acting like that.”

The Council of Mortgage Lenders said there were no industry guidelines for how deeply in arrears a lender had to be for a home loan provider to be entitled to launch repossession proceedings.

The government said last night it would bring forward laws forcing lenders to offer alternative payment schemes before they were allowed to take back possession of the property.

Northern Rock denied that it was overly aggressive. “Repossession proceedings are only launched as a last resort,” it said.

The details of the prime minister’s extra spending on public works is expected to be unveiled in the pre-budget report next month. Brown has already tasked his new “enforcer”, the Cabinet Office minister, Liam Byrne, with compiling a list of major construction projects at risk from the credit crunch that would benefit from extra government support.

Brown’s handling of the financial crisis has failed to improve Labour’s electoral prospects. Despite most voters saying he had performed well over the past few weeks, only 13% said they were now more likely to vote Labour, an ICM survey for the News of the World found.

    Britain faces crisis as negative equity to reach 2 million,
    STs, 19.10.2008,
    http://www.timesonline.co.uk/tol/money/
    property_and_mortgages/article4969314.ece

In Rescue to Stabilize Lending,

U.S. Takes Over

Mortgage Finance Titans

September 8, 2008
The New York Times
By STEPHEN LABATON
and EDMUND L. ANDREWS

WASHINGTON — The Bush administration seized control of the nation’s two largest mortgage finance companies on Sunday, seeking to shrink drastically their outsize influence on Wall Street and on Capitol Hill while at the same time counting on them to pull the nation out of its worst housing crisis in decades.

The bailout plan for the companies, Fannie Mae and Freddie Mac, a seismic event in a year of repeated financial crises followed by aggressive federal intervention, places the companies in a government conservatorship, much like a bankruptcy reorganization. The plan also replaces the management of the companies.

The rescue package represents an extraordinary federal intervention in private enterprise. It could become one of the most expensive financial bailouts in American history, though it will not involve any immediate taxpayer loans or investments.

The Treasury secretary, Henry M. Paulson Jr., who engineered the plan, would not say how much capital the government might eventually have to provide, or what the ultimate cost to taxpayers might be. Two months ago, the Congressional Budget Office gave a rough estimate of $25 billion. One senior government official, speaking on the condition of anonymity, signaled on Sunday that even that figure was optimistic.

Mr. Paulson said Sunday that it was important to rescue the mortgage giants because a failure of either company would cause turmoil in financial markets in the United States and around the world.

“This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement,” he said. “A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.”

The plan received wide bipartisan support on Sunday, from Congressional lawmakers and both presidential campaigns.

As part of the plan, the chief executives of both companies were replaced. Herbert M. Allison Jr., the former chairman of TIAA-CREF, the huge pension fund for teachers that also offers mutual funds, will take over Fannie Mae and succeed Daniel H. Mudd. At Freddie Mac, David M. Moffett, currently a senior adviser at the Carlyle Group private equity firm, succeeds Richard F. Syron. Mr. Mudd and Mr. Syron, however, will stay on during a transition period.

The plan also commits the government to provide as much as $100 billion to each company to backstop any shortfalls in capital. It enables the Treasury to ultimately buy the companies outright at little cost. It bans them from lobbying the government, putting an end to their ability to use their political machine on Capitol Hill.

It also eliminates dividend payments to current shareholders while protecting the principal and interest payments on the debt, now held by foreign central banks, financial institutions, pensions funds and others.

The Treasury will force both companies to shrink their portfolios over the long term; they now hold or guarantee about half of the country’s mortgages. In addition, the government plans to buy significant amounts of their mortgage-backed securities on the open market, beginning with the purchase of $5 billion worth this month. This step, never before undertaken by the government, could begin to restore some confidence in the credit markets and lead to lower interest rates for home mortgages.

For the companies, the takeover caps an ignominious downfall. Fannie was created during the depths of the Great Depression, and Freddie in 1970, to help make mortgages more affordable for homeowners. The companies buy billions of dollars in mortgages each month from commercial lenders. Some are sold to investors as mortgage-backed securities; others are held by the companies in their own investment portfolios.

The plan represents a cease-fire in a decades-long ideological battle over the proper role of the companies. Free-market conservatives see the companies as extensions of “big government,” while Democrats have protected them as the main vehicle to promote affordable housing for middle- and lower-income people.

Alan Greenspan, the former Federal Reserve chairman, and Lawrence H. Summers, a Treasury secretary under President Bill Clinton, along with many other critics, have long maintained that the companies were too powerful politically and financially, and that their huge portfolios posed enormous risks to the financial system.

Moreover, these critics have complained, the companies have used their ability to borrow at low interest rates to dominate the mortgage-finance market, usurping the role of other financial institutions, which do not have the same subsidy.

Free-market adherents have warned of impending disaster as Fannie and Freddie used an implicit government backing to borrow at will, with only a tiny sliver of capital to protect them from nasty surprises like the recent sharp decline in housing prices and rise in foreclosures.

Mr. Paulson has sought to avoid taking sides in the debate, but in recent months came to the conclusion that the companies’ conflicting missions of providing federally backed financing for affordable housing while serving shareholders were untenable.

“Market discipline is best served when shareholders bear both the risk and the reward of their investment,” Mr. Paulson said on Sunday. “While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.”

Holders of the companies’ common stock will not fare well. The plan suspends their dividend payments and holds the potential to make their shares virtually worthless if the government chooses to exercise its right to buy the common stock. The stock of both companies, which traded above $60 a share last year, had fallen below $10 a share recently. Their shares will continue to trade and could fall further as a result of the government seizure.

Mr. Paulson made clear that the solution put forward on Sunday would only defer the most important decisions about the mission of the companies for the next president and Congress.

At a news conference on Sunday, Mr. Paulson said: “There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or nonexistent, and structured to resolve the conflict between public and private purposes.”

The plan requires the companies to shrink their portfolios long after the administration leaves, officials acknowledged, adding that they hoped to prod Congress into deciding what the role of the companies should be.

Hoping to limit potential taxpayer losses and gain any financial windfall if the companies are restored to profitability, the administration, in exchange for the investment commitment, will receive so-called stock warrants, or purchase rights, for up to 80 percent of the companies’ common shares at less than $1 a share. In after-hours trading on Sunday, Freddie Mac fell $1.06, or nearly 21 percent while Fannie Mae dropped $1.54, or 22 percent.

The companies agreed to provide the government with $1 billion of new preferred senior stock, which will pay the Treasury a dividend of at least 10 percent a year, as well as an unspecified quarterly payment to compensate the Treasury for any taxpayer money injected into the companies.

The companies will be allowed to “modestly increase” the size of their existing investment portfolios until the end of 2009, which means they can use some of their new taxpayer-supplied capital to buy and hold new mortgages in investment portfolios.

But in a strong indication of Mr. Paulson’s wish to wind down the companies’ portfolios, drastically shrink their role and perhaps eliminate their unique status altogether, the plan calls for the companies to start reducing their investment portfolios 10 percent a year, beginning in 2010.

In addition, the Treasury Department will create a so-called Secured Lending Credit Facility, a backup source of borrowing for the companies in the event that they cannot borrow enough money on the open market to finance their main business of buying mortgages and reselling them as pools of mortgage-backed securities.

While the government takeover seemed to catch some financial experts by surprise, Treasury officials appeared to have little choice, with the credit markets in a tailspin and investors reluctant to buy mortgages with even a hint of risk. Fannie and Freddie now guarantee about 70 percent of all new home loans, said Mr. Lockhart, the chief regulator of the companies.

The initial reaction to the plan was mostly positive. Senator John McCain, the Republican nominee for president, said on CBS’s “Face the Nation” on Sunday that he supported the Treasury move, but he also implicitly criticized the Bush administration’s oversight.

“It’s an example of cronyism, special interest, lobbyists,” he said, adding that the companies needed “more regulation, more oversight, more transparency, more of everything, and frankly, a dramatic reduction in what they do.”

Senator Joseph R. Biden Jr., the Democratic nominee for vice president, said on NBC’s “Meet the Press” Sunday that he had spoken to Mr. Paulson on Saturday night, and that he thought the plan had a good chance of succeeding. “It’s not an official reorganization. It will be left to the next administration and the Congress to make those judgments,” Mr. Biden said.

After being briefed by Mr. Paulson, the billionaire investor Warren E. Buffett said: “Secretary Paulson has made exactly the right decision for the country. He is minimizing the problem of moral hazard and maximizing the benefits for the housing market and for the smooth functioning of financial markets.”

Democratic and Republican lawmakers also spoke approvingly of the decision. They said that restoring stability to the financial markets was the top priority. But some longtime critics of the companies complained that their warnings had gone unheeded for too long.

“Fannie and Freddie were allowed to grow too quickly and for too long without the strong oversight required of such government chartered firms,” said Senator John E. Sununu, Republican of New Hampshire, who is facing a tough campaign for re-election.

Asian stock markets rallied at the opening on Monday after the Treasury’s announcement. The Tokyo market rose 2.8 percent and Australia’s market jumped 3.2 percent.

Futures contracts on the Standard & Poor’s 500-stock index jumped more than 2 percent in early Asian trading as investors concluded that the decision had strengthened the prospects for American businesses, particularly banks, and for the American economy.

The dollar and yen weakened against the euro and the British pound by late Monday morning in Asia as investors began to conclude that European economies might not be in as grave danger as they had seemed last week.

Treasury officials emphasized that the companies would open for business as usual on Monday and that, at least for now, almost nothing would change in their normal course of business.

Keith Bradsher contributed reporting from Hong Kong.

    In Rescue to Stabilize Lending,
    U.S. Takes Over Mortgage Finance Titans, NYT, 8.9.2008,
    http://www.nytimes.com/2008/09/08/business/08fannie.html

Housing crisis:

One in seven homeowners

could be victims of negative equity

· Drop in property prices could be as sharp as 35%
· Credit agency warns of return to crisis of early 90s

Thursday July 31 2008
The Guardian
Larry Elliott, economics editor

Britain is on course for a repeat of the negative equity crisis of the early 1990s as a further year of tumbling house prices leaves one in seven homeowners in a property worth less than their mortgage, the ratings agency Standard & Poor's warned yesterday.

In a report on the state of the housing market, the company punctured optimism about a soft landing when it predicted that a further 17% drop in the cost of the average home would prompt a rise from 70,000 to 1.7 million in negative equity cases - equalling the peak of the housing market meltdown of the early 1990s.

Andrew South, a credit analyst at S&P, said: "The downward trend in UK house prices now seems well established, and we expect prices to continue falling in the near term."

The rapid increase in house prices during the decade-long upswing has meant that only a fraction of mortgage payers - 0.6% - are currently in negative equity. But in recent months house prices have been falling at the sharpest rate on record and S&P said that for every further percentage point fall in the cost of property, 0.5%-1.5% of borrowers (between 60,000 and 180,000) could enter negative equity. Noting that the trough in the cycle would not be reached until 2009, S&P said: "At this point, we expect 1.7 million borrowers - around 14% - would be in negative equity."

Other forecasters are even gloomier than S&P, with the consultancy firm Capital Economics predicting a 35% drop in house prices from their peak last year.

Liberal Democrat Treasury spokesman Vince Cable said: "When I warned of this degree of negative equity a few months ago I was accused of excessive scaremongering. But the idea of nearly two million homeowners facing negative equity is now regarded as mainstream by many experts."

A return to the negative equity levels of the early 1990s would put additional pressure on the government to help homeowners. Alistair Darling received an interim report this week on the mortgage market from the former HBOS chief Sir James Crosby, and is expected to come up with proposals in the autumn pre-budget report.

Some mortgage providers have been taking advantage of more stable conditions in the City's money markets to reduce home loan costs marginally over the past few weeks, but a cut in the bank rate from the Bank of England is considered highly unlikely while inflation is rising.

It discussed raising interest rates at its meeting this month and cheaper borrowing costs are seen as off the agenda until late 2008 at the earliest.

S&P said borrowers in the buy-to-let and sub-prime sectors were most at risk from negative equity. "A further 17% decline in house prices could put around 24% of non-conforming borrowers into negative equity, compared with only 13% of prime borrowers."

The predictions by S&P came as the British Bankers' Association (BBA) published statistics suggesting that the industry was not returning to the record level of repossessions of 1992, when 75,500 homes were taken back by lenders.

The statistics, which cover 25 years of banking to the end of last year, showed that 27,000 homes were repossessed last year.

There are predictions that repossessions could reach 45,000 by the end of this year, which would represent 12 out of every 10,000 properties that have a mortgage outstanding.

The BBA statistics reflect the impact of the credit crunch. By the end of 2007, mortgage lending had fallen by 17%, although the average value of a loan had increased by 10% to £153,900.

Back to the 90s?

14%
of owners may be in negative equity by 2009,
says Standard & Poor's

1.7m
Number of people this would affect,
the same as in the early 1990s

75,500
Number of homes repossessed in 1992,
when the crash was at its height

45,000
Number predicted for 2008,
12 out of every 10,000 mortgaged properties

    Housing crisis:
    One in seven homeowners could be victims of negative equity,
    G, 31.7.2008,
    http://www.guardian.co.uk/money/2008/jul/31/houseprices.creditcrunch

Bush Signs Housing Bill

July 30, 2008 8:08 a.m.
Associated Press

WASHINGTON -- President George W. Bush on Wednesday signed a massive housing bill intended to provide mortgage relief for 400,000 struggling U.S. homeowners and to stabilize financial markets.

Mr. Bush signed the bill without any fanfare or signing ceremony, affixing his signature to the measure he once threatened to veto in the White House's Oval Office in the early morning hours. He was surrounded by top administration officials, including Treasury Secretary Henry Paulson and Housing Secretary Steve Preston.

"We look forward to put in place new authorities to improve confidence and stability in markets," White House spokesman Tony Fratto said. He added that the Federal Housing Administration would begin right away to implement new policies "intended to keep more deserving American families in their homes."

The measure, regarded as the most significant U.S. housing legislation in decades, lets homeowners who cannot afford their payments refinance into more affordable government-backed loans rather than losing their homes. It offers a temporary financial lifeline to troubled mortgage companies Fannie Mae and Freddie Mac, and tightens controls over the two government-sponsored businesses.

The House of Representatives passed the bill a week ago; the Senate voted Saturday to send it to the president.

Mr. Bush didn't like the version emerging from Congress, and initially said he would veto it, particularly over a provision containing $3.9 billion in neighborhood grants. He contended the money would benefit lenders who helped cause the mortgage meltdown, encouraging them to foreclose rather than work with borrowers. But he withdrew that threat early last week, saying hurting homeowners couldn't wait -- and even blaming the Democratic Congress' delays in action for forcing an imperfect solution.

Meanwhile, many Republicans, particularly those from areas hit hardest by housing woes, were eager to get behind a housing rescue as they looked ahead to tough re-election contests. Mr. Paulson's request for the emergency power to rescue Fannie Mae and Freddie Mac helped push through the measure. So did the creation of a regulator with stronger reins on the government-sponsored companies, which Republicans have long sought.

Democrats won cherished priorities in the bargain: the aid for homeowners, a permanent affordable housing fund financed by Fannie Mae and Freddie Mac, and the $3.9 billion in neighborhood grants.

    Bush Signs Housing Bill, WSJ, 30.7.2008,
    http://online.wsj.com/article/
    SB121741699750696667.html?mod=hpp_us_whats_news

Worst Fears Ease, for Now,

on Mortgage Giants’ Fate

July 12, 2008
The New York Times
By STEPHEN LABATON

WASHINGTON — A day that began with a stomach-churning drop in stock prices for the two largest mortgage finance companies ended with a measure of relief, after government officials and lawmakers managed to calm investors worried about the health of the two companies.

Bush administration officials had worked into the early morning hours on Friday drawing up contingency plans to rescue the companies, Fannie Mae and Freddie Mac, should their financial plight worsen. And when both companies’ stocks fell 50 percent initially, some investors feared the worst.

But by the end of the day, the shares rebounded after both were able to easily continue the regular borrowing of money they need to finance their day-to-day operations and keep the nation’s mortgage machinery humming.

If Fannie and Freddie had been cut off from borrowing by other financial institutions, the government might have been forced to step in and support them.

Still, the modest relief on Friday was tempered by concerns over what might unfold in coming weeks, should the housing market’s woes continue and further weaken the finances of Fannie and Freddie.

Uncertainty about the financial stability of the companies, which lie at the heart of the nation’s housing market, underscored their size and complexity.

Both companies, which already have suffered $11 billion in losses in the last nine months, could report new quarterly losses in August if foreclosures continue.

The financial markets continue to show signs of stress, underscored by the decline in the Dow Jones industrial average, which fell below 11,000 on Friday for the first time in two years before closing at 11,100.54, down 1.1 percent.

Shares of Freddie Mac closed at $7.75, down more than 45 percent for the week. Fannie Mae settled at $10.25, a 30 percent slide for the week. And a fresh sign of industry problems emerged on Friday when the Federal Deposit Insurance Corporation seized IndyMac Bank, making it the largest bank to fail since the 1990s.

The company, an offshoot of Countrywide Financial and once one of the nation’s largest independent mortgage lenders, was a major issuer of subprime loans.

After meeting with his economic policy team on Friday morning, President Bush said that he had been briefed about the problems confronting Fannie and Freddie by the Treasury secretary, Henry M. Paulson Jr.

“Freddie Mac and Fannie Mae are very important institutions,” the president said. “He assured me that he and Ben Bernanke will be working this issue very hard,” referring the chairman of the Federal Reserve.

Earlier in the day, Mr. Paulson sought to calm investors concerned that the stock of Fannie and Freddie could be wiped out if the government took over one or both of the companies and placed them under the control of a conservator, as the law permits. The administration has prepared such a plan if the companies continue to decline, people briefed on the plan have said.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Mr. Paulson said. Officials said Mr. Paulson wanted to convey the message that even under a conservatorship, the companies would not be nationalized. Instead, a conservator would have to prepare a plan to restore the company to financial health, much like a company in Chapter 11 bankruptcy proceedings.

Federal Reserve officials took pains to dismiss rumors swirling through the markets and in Washington that the central bank was considering a new program to lend money directly to the companies through its so-called discount window. The Fed began two such programs to lend money to the nation’s largest investment banks last March.

“Fed officials are following the situation closely,” said Michelle A. Smith, the Fed’s chief spokeswoman. “We’ve had no discussions with the companies about the discount window. We don’t discuss the range of options we are considering.”

After a flurry of phone calls with administration and Fed officials, senior Democrats in Congress also said they were persuaded that the steep declines in the stock of the two companies did not reflect new underlying financial problems, and that the companies had the financial wherewithal to get through the turmoil. Their comments went far beyond the cautiously worded assurances by senior officials earlier in the week that had done little to calm the markets.

“There is a sort of a panic going on and that’s not what ought to be,” said Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee. “The facts don’t warrant that reaction, in my view.”

Mr. Dodd said that he was persuaded by conversations with Mr. Paulson and Mr. Bernanke that the two companies “are fundamentally sound and strong.”

He said that housing legislation the Senate approved on Friday evening, part of which would overhaul the regulation of Fannie and Freddie, could be completed by Congress and signed into law by President Bush by next week. The measure, sponsored by Mr. Dodd, must go back to the House to be reconciled with its version adopted in May.

Investors, left dizzy by the rapid-fire turns in Freddie and Fannie’s shares, suffered through one of the most volatile days in the market since the Bear Stearns debacle in March.

The day began darkly with investors confronting figures that once seemed unthinkable: Freddie Mac’s stock was down a whopping 50 percent, with Fannie Mae not far behind. As rumors of a government bailout made their way across trading desks, Mr. Paulson’s statement — suggesting that no government takeover of Fannie and Freddie was imminent — seemed to only increase the uncertainty.

“Paulson jumped in earlier today and tried to be reassuring, but in many ways it backfired,” Edward Yardeni, an investment strategist, said. “He really didn’t say anything that he hadn’t before.”

But some investors saw the depressed shares as a buying opportunity. At the close, Freddie finished down just 3 percent, a relief to investors who had feared the worst. Fannie, however, sold off 22 percent of its value.

As they watched the markets, senior officials at the Treasury and the Federal Reserve were described on Friday as being less fixated on the stock prices of Fannie and Freddie and more interested in the companies’ ability to raise money to continue to fund their daily operations and buy new mortgages from banks and other lenders.

The two companies already own or guarantee more than $5 trillion in mortgages. They need to borrow money constantly so they can buy mortgages from lenders, repackage them as securities and sell them to investors.

Fannie and Freddie hold some of the mortgages they buy in their own investment portfolios; the rest are sold to pension funds, mutual funds and other investors, with Fannie and Freddie guaranteeing each mortgage against default by the homeowner. Officials noted that the companies’ ability to raise money had improved in recent months, including on Friday, allowing the companies to borrow at rates close to those of the United States Treasury.

One interpretation of this is that the debt markets believe that the federal government will take steps to bail out the companies should they become insolvent. Moreover, the insurance premiums that are paid by the buyers of the debt securities issued by the companies declined significantly on Friday, a sign that the markets do not believe the companies are on the brink of failure.

“In these volatile markets, share price is not the most reliable measure for judging Fannie and Freddie and will not dictate the responses by the regulators,” said Senator Charles E. Schumer, Democrat of New York, who has held discussions all week with senior administration officials. “Rather, the regulators are closely watching the performance of the companies’ bonds, and how their yields compare to U.S. Treasuries. Right now, Freddie and Fannie bonds are trading closer to Treasuries than they were in March after the Bear Stearns collapse, a reassuring signal.”

It was a crushing liquidity problem — as lenders called in existing loans and refused to lend any more — that ultimately prompted the government to rescue Bear Stearns last March from possible bankruptcy.

Normally, when a company’s stock price plunges to dangerously low levels, the company also has significant problems raising money in the debt markets because borrowers fear that they may not be repaid. But in a perverse cycle, the news this week that the government was considering putting them into a conservatorship has had the effect of making the debt of those companies more attractive.

Fannie Mae, founded in 1938, was originally called the Federal National Mortgage Association, but adopted its nickname as a formal title in the 1990s. Its younger and smaller sibling, Freddie Mac, was begun in 1970.

Michael M. Grynbaum contributed reporting from New York.

Worst Fears Ease, for Now, on Mortgage Giants’ Fate, NYT, 12.7.2008,
http://www.nytimes.com/2008/07/12/business/12fannie.html

Lending laws unenforced

in housing crisis: Jackson

Wed Feb 20, 2008
5:37pm EST
Reuters
By Michele Gershberg

NEW YORK (Reuters) - A U.S. mortgage meltdown has its roots in lending discrimination against African-American and Hispanic communities and requires federal intervention to prevent it from crippling municipal services, civil rights activist Rev. Jesse Jackson said on Wednesday.

Jackson told the Reuters Housing Summit in New York that nearly 40 percent of subprime loans went to black and Hispanic families, many of them in districts once shunned by discriminatory "redlining" lenders who later devised a way to profit there by selling a flawed financial product.

"They began to stereotype and target and cluster whole communities. It's kind of like reverse redlining," Jackson said.

Jackson estimates that nearly half of those borrowers could have been eligible for regular loan packages, but instead were locked into mortgages that threaten to balloon out of their ability to pay when the adjustable interest rates reset.

"It suggests that if fair lending laws had been enforced ... we would not have had this global economic crisis," Jackson said. "But while it started by unenforced civil rights laws, the bleeding has not stopped there. It's now engulfing the budgets of cities and counties and states."

Jackson also said that the U.S. Department of Justice was slow to respond, if at all, to concerns of lending discrimination.

An estimated 1.5 million subprime mortgages, traditionally targeted at borrowers with poor credit histories, will reset to higher interest rates this year, putting many owners at risk of losing their homes. Another 500,000 will reset in 2009, according to Federal Reserve estimates.

Jackson said the federal government should institute a halt to foreclosure proceedings and authorize the Federal Housing Administration or another body to start a major restructuring of subprime loans, with lower interest rates and payments spread out over a longer period.

He also called on state attorneys general to subpoena the major lenders on their loan practices and impose penalties on those who have violated the law.

He described President George W. Bush's plan to offer $152 billion in tax rebates this year to fend off a possible recession as irrelevant to the needs of home owners facing foreclosure and ignoring the cause of the crisis.

(Editing by Gary Hill)

Lending laws unenforced in housing crisis: Jackson, R, 20.2.2008,
http://www.reuters.com/article/Housing08/idUSN2039245920080220

Review of the year

From the sub-prime to the ridiculous:

how $100bn vanished

Mighty institutions and powerful figures
undermined by pitiful little property deals

Monday December 31 2007
The Guardian
David Teather

It began with low-income Americans being encouraged to borrow mortgages they couldn't afford.

The economic butterfly effect would eventually cause deals worth billions of dollars to fall apart; the first run on a British bank in 140 years; some of the most powerful figures on Wall Street losing their jobs; wild gyrations on the markets; and dire warnings that the world is on the brink of recession.

At the start of the year, stockmarkets were at six-year highs and £40bn worth of mergers and takeovers were awaiting completion. Private equity firms and hedge funds were gorging themselves on cheap money and a handful of secretive, hugely wealthy individuals were becoming increasingly influential. But it was the millions on more modest incomes who would ultimately shape the events of 2007.

As the US housing market cooled and interest rates rose, many on the bottom rungs of the economic ladder found it difficult to meet their monthly mortgage repayments.

The first real concerns about sub-prime mortgages emerged at the end of February, when Wall Street suffered its worst day since the terrorist attacks of 2001. By April one of the biggest sub-prime mortgage lenders in the US had gone bankrupt and there was talk of a full-blown crisis. Credit more broadly began to dry up as lenders became nervous.

Fear also spread as it became clear that much of the bad debt had been packaged up and sold on around the world's financial system. Nobody, not even the banks themselves, knew who owned the toxic debt.

Some otherwise arcane practices of the financial world such as collateralised debt obligations and structured investment vehicles suddenly became everybody's concern.

The flood of private equity money turned into a trickle as it became more difficult to borrow, derailing deals including an attempt to buy J Sainsbury and, at the close of the year, an attempt by Lord Harris to take Carpetright private. Hedge funds too, which rely on leveraging their funds, have had their wings clipped.

The credit crunch was behind the biggest story of the year, Northern Rock. It emerged in September that the bank had been forced to apply to the Bank of England for emergency funds as liquidity had dried up in the market. Savers were told not to panic. But they did anyway. The next day, there were long lines of people threading through high streets across Britain, hoping to retrieve their cash.

The scenes triggered a postmortem into how a major bank - the fifth biggest provider of mortgages in the country - could reach the brink of collapse without any apparent action to prevent it from going under.

The inquest has so far given us the phrase "moral hazard" from the governor of the Bank of England, Mervyn King, who believed it was outside his remit to rescue a bank that had got into difficulties through risky borrowing on international money markets. It has also given us the sight of MPs from the Treasury select committee grappling to discover who from the much lauded tripartite structure of regulation for the UK financial system - the Bank of England, the Treasury and the Financial Services Authority - was to blame for the fiasco.

But it has not given us any definitive answers save that Northern Rock should not have risked so much on such a finely calibrated business model and should have seen it coming.

King came under pressure to quit but no one from the tripartite system has fallen on their sword. Even the architect of the business model, Northern Rock's chief executive Adam Applegarth, hung on until the middle of November when he finally resigned.

The stricken bank has received £25bn of taxpayers' cash. There are still two potential bidders - Sir Richard Branson's Virgin and the Olivant vehicle led by former Abbey National boss Luqman Arnold. Other options include nationalisation or a carve-up among high street banks.

As the mortgage crisis spread, Wall Street bosses began dropping like neatly lined-up dominoes. Stan O'Neal was forced out at Merrill Lynch and Charles Prince was ousted from the world's largest banking group, Citigroup. The most powerful woman on Wall Street, Zoe Cruz, lost her job at Morgan Stanley when the bank recorded losses of $3.7bn. Another Wall Street bank, Bear Stearns, suffered the first loss in its 84-year history.

The numbers just kept getting bigger. This month the Swiss bank UBS wrote off a further $10bn of sub-prime loans, on top of $3.4bn already announced. Two days later the Bank of England joined other central banks in pouring £50bn into the financial markets in the hope of staving off a meltdown. A succession of Wall Street banks have turned to sovereign funds in China, Singapore and the Middle East for injections of cash. The unravelling of events has been a stunning example of how interdependent the world economy has become.

Confidence appears to be ebbing. Retailers in Britain were forced to slash prices before Christmas to shift stock. According to the Royal Institute of Chartered Surveyors, house prices in Britain are falling at their fastest rate in two years. The outlook for jobs is the worst for a decade. Jon Hunt, who sold the estate agency Foxtons in April, may, it turns out, have called the top of the market.

In numbers

$99.29

The oil price reaches its peak just short of $100 a barrel (November 21)

$2

The pound hits $2 for the first time since 1992 (April 16)

£1.1bn

Price HSBC receives selling its headquarters in Canary Wharf (April 30)

$100bn

Ben Bernanke's estimate of total sub-prime losses (July 19

From the sub-prime to the ridiculous: how $100bn vanished,
G, 31.12.2007,
https://www.theguardian.com/business/2007/dec/31/
subprimecrisis.creditcrunch

Tent city in suburbs

is cost of home crisis

Fri Dec 21, 2007
8:18am EST
Reuters
By Dana Ford

ONTARIO, California (Reuters) - Between railroad tracks and beneath the roar of departing planes sits "tent city," a terminus for homeless people. It is not, as might be expected, in a blighted city center, but in the once-booming suburbia of Southern California.

The noisy, dusty camp sprang up in July with 20 residents and now numbers 200 people, including several children, growing as this region east of Los Angeles has been hit by the U.S. housing crisis.

The unraveling of the region known as the Inland Empire reads like a 21st century version of "The Grapes of Wrath," John Steinbeck's novel about families driven from their lands by the Great Depression.

As more families throw in the towel and head to foreclosure here and across the nation, the social costs of collapse are adding up in the form of higher rates of homelessness, crime and even disease.

While no current residents claim to be victims of foreclosure, all agree that tent city is a symptom of the wider economic downturn. And it's just a matter of time before foreclosed families end up at tent city, local housing experts say.

"They don't hit the streets immediately," said activist Jane Mercer. Most families can find transitional housing in a motel or with friends before turning to charity or the streets. "They only hit tent city when they really bottom out."

Steve, 50, who declined to give his last name, moved to tent city four months ago. He gets social security payments, but cannot work and said rents are too high.

"House prices are going down, but the rentals are sky-high," said Steve. "If it wasn't for here, I wouldn't have a place to go."

'SQUATTING IN VACANT HOUSES'

Nationally, foreclosures are at an all-time high. Filings are up nearly 100 percent from a year ago, according to the data firm RealtyTrac. Officials say that as many as half a million people could lose their homes as adjustable mortgage rates rise over the next two years.

California ranks second in the nation for foreclosure filings -- one per 88 households last quarter. Within California, San Bernardino county in the Inland Empire is worse -- one filing for every 43 households, according to RealtyTrac.

Maryanne Hernandez bought her dream house in San Bernardino in 2003 and now risks losing it after falling four months behind on mortgage payments.

"It's not just us. It's all over," said Hernandez, who lives in a neighborhood where most families are struggling to meet payments and many have lost their homes.

She has noticed an increase in crime since the foreclosures started. Her house was robbed, her kids' bikes were stolen and she worries about what type of message empty houses send.

The pattern is cropping up in communities across the country, like Cleveland, Ohio, where Mark Wiseman, director of the Cuyahoga County Foreclosure Prevention Program, said there are entire blocks of homes in Cleveland where 60 or 70 percent of houses are boarded up.

"I don't think there are enough police to go after criminals holed up in those houses, squatting or doing drug deals or whatever," Wiseman said.

"And it's not just a problem of a neighborhood filled with people squatting in the vacant houses, it's the people left behind, who have to worry about people taking siding off your home or breaking into your house while you're sleeping."

Health risks are also on the rise. All those empty swimming pools in California's Inland Empire have become breeding grounds for mosquitoes, which can transmit the sometimes deadly West Nile virus, Riverside County officials say.

'TRICKLE-DOWN EFFECT'

But it is not just homeowners who are hit by the foreclosure wave. People who rent now find themselves in a tighter, more expensive market as demand rises from families who lost homes, said Jean Beil, senior vice president for programs and services at Catholic Charities USA.

"Folks who would have been in a house before are now in an apartment and folks that would have been in an apartment, now can't afford it," said Beil. "It has a trickle-down effect."

For cities, foreclosures can trigger a range of short-term costs, like added policing, inspection and code enforcement. These expenses can be significant, said Lt. Scott Patterson with the San Bernardino Police Department, but the larger concern is that vacant properties lower home values and in the long-run, decrease tax revenues.

And it all comes at a time when municipalities are ill-equipped to respond. High foreclosure rates and declining home values are sapping property tax revenues, a key source of local funding to tackle such problems.

Earlier this month, U.S. President George W. Bush rolled out a plan to slow foreclosures by freezing the interest rates on some loans. But for many in these parts, the intervention is too little and too late.

Ken Sawa, CEO of Catholic Charities in San Bernardino and Riverside counties, said his organization is overwhelmed and ill-equipped to handle the volume of people seeking help.

"We feel helpless," said Sawa. "Obviously, it's a local problem because it's in our backyard, but the solution is not local."

(Additional reporting by Andrea Hopkins in Ohio;

Editing by Mary Milliken and Eddie Evans)

Tent city in suburbs is cost of home crisis, R, 21.12.2007,
http://www.reuters.com/article/domesticNews/idUSN1850682120071221

Editorial

The American Dream in Reverse

October 8, 2007
The New York Times

For the first time since the Carter administration, homeownership in the United States is set to decline over a president’s tenure. When President Bush took office in 2001, homeownership stood at 67.6 percent. It rose as the mortgage bubble inflated but is projected to fall to 67 percent by early 2009, which would come to 700,000 fewer homeowners than when Mr. Bush started. The decline, calculated by Moody’s Economy.com, is inexorable unless the government launches a heroic effort to help hundreds of thousands of defaulting borrowers stay in their homes.

These days, modest relief efforts are in short supply, let alone heroic ones. Some officials seem to think that assistance would violate the tenet of personal responsibility that borrowers should not take out loans they cannot afford. That is simplistic.

The foreclosure crisis is rooted in reckless — and shamefully underregulated — mortgage lending. Many homeowners — mainly subprime borrowers with low incomes and poor credit — are now stuck in adjustable-rate loans that have become unaffordable as monthly payments have spiked upward. Their predicament is not entirely of their own making, and even if it were they would need to be bailed out because mass foreclosures would wreak unacceptable damage on the economic and social life of the nation.

The relief efforts so far have been too little, too late. In August, the White House established a program to allow an additional 80,000 borrowers to refinance their loans through the Federal Housing Administration — on top of 160,000 who were already eligible. That’s not enough. Foreclosure filings soared to nearly 244,000 in August alone.

Federal regulators and Treasury officials are urging mortgage lenders and mortgage servicers to do their utmost to modify loan terms for at-risk borrowers, but saying “please” hasn’t worked. To be effective, modifications must reduce a loan’s interest rate or balance or extend its term, or some combination of the three. Gretchen Morgenson reported recently in The Times that a survey of 16 top subprime servicers by Moody’s Investors Service found that in the first half of the year, modifications were made to an average of only 1 percent of loans on which monthly payments had increased.

What’s missing is executive leadership to bring together many players, including lenders, servicers, bankers and various investors. All of them are affected differently depending on whether and how a borrower is rescued, which makes it difficult to agree on a rescue plan. But all of them also made megaprofits during the mortgage bubble. Under firm leadership, they could come up with a way to modify many loans that are now at risk.

Democratic Congressional leaders have called on the Bush administration to appoint one senior official to lead a foreclosure relief effort. The White House dismissed the idea, saying, in effect, that it’s doing enough.

Congress should move forward on other remedies. The most important is to mend an egregious flaw in the current bankruptcy law that prohibits the courts from modifying repayment terms of most mortgages on a primary home. Two bills, one in the House and one in the Senate, would treat a mortgage like other secured debt, allowing a bankruptcy court to restructure it so that it’s affordable for the borrower. That would give defaulting homeowners and their advocates much needed leverage in dealing with lenders and servicers. Creditors would presumably prefer to cut a deal with a borrower rather than be subject to the decision of a bankruptcy judge.

The administration and Congress should work to avoid mass foreclosures. Meanwhile, bankruptcy reform would give borrowers a shot at keeping their homes.

The American Dream in Reverse, NYT, 8.10.2007,
http://www.nytimes.com/2007/10/08/opinion/08mon1.html

'Housing boom over'

as UK bank chaos grows

· Economist warns of sharp downturn
· Tory leader attacks Brown over crisis

Sunday September 16, 2007

The Observer

Heather Stewart

and Lisa Bachelor

Britain's house price growth will be halved next year as the global financial crisis exacerbates the impact of rising mortgage rates, according to Nationwide, the biggest mortgage lender.

After the dramatic bail-out of high street bank Northern Rock underlined the impact of the American 'sub-prime' mortgage crisis on Britain's financial sector, Fionnuala Earley, Nationwide's group economist, said she expected house price inflation to slow to around 3 per cent next year.

Thousands of anxious customers queued outside Northern Rock branches for a second day yesterday, ignoring calls for calm from the Chancellor, Alistair Darling, and the bank's management, and sparking fears of a full-blown 'run' on the bank.

Speaking to Channel 4 News last night, Darling said he had been assured by the Financial Services Authority that Northern Rock was capable of meeting its financial obligations to its customers.

In the first signs of political fallout from the crisis, David Cameron accused Gordon Brown of failing to rein in public and private borrowing over the last decade, saying the nation's economic growth is based on a 'mountain of debt'. Writing in today's Sunday Telegraph, the Tory leader says: 'This government has presided over a huge expansion of public and private debt without showing awareness of the risks involved.

'Though the current crisis may have had its trigger in the United States... under Labour our economic growth has been built on a mountain of debt.'

House price growth was running at just below 10 per cent in August, but Nationwide believes it will have dropped to 7 per cent by December and continue slowing throughout next year.

The worldwide credit crunch that pushed Northern Rock to the brink of collapse could make a housing market slowdown worse, Earley warned. 'I think all it can do is make it [the market] cooler: that comes through sentiment, and through expectations.'

With base interest rates at a six-year high of 5.75 per cent, economists said that the feelgood factor was already evaporating and that the Northern Rock crisis could deal a fresh blow to confidence.

'This confirms some of the fears that people had, and reinforces the idea that they need to be more circumspect, and that money is tighter,' said Richard Hyman, director of retail research firm Verdict.

'It couldn't have come at a worse time: consumer confidence was already heading south,' said Kevin Hawkins, director general of the British Retail Consortium, though he added that, as long as Northern Rock was the only casualty, the effects could be short-lived.

A report from property website Rightmove, released on Friday, showed that property prices fell in the last month for the first time in three years. It is expected that, although there will be overall growth in the housing market, some areas of the UK could suffer significant price decline.

Meanwhile, Northern Rock apologised to customers last night, saying it was 'disappointed to see uncertainty caused'. The apology came amid growing speculation of a takeover bid, with HSBC and Lloyds TSB both being mooted as potential suitors. Insiders are predicting that a takeover could occur within weeks to secure the bank's future. One plan currently being looked at by City bankers is to divide the company's £100 billion mortgage portfolio between some of the major banks.

Savers have been rushing to pull out their cash since it emerged last Thursday that Darling had sanctioned an emergency loan from the Bank of England to prevent Northern Rock going bust.

One couple had even camped outside Northern Rock's Cheltenham branch in Gloucestershire overnight, desperate to withdraw the £1m proceeds of a house sale. 'We were told that because our money was in an online account we wouldn't be able to withdraw it there and then,' said Fiona Howard. 'That money is our lifeline, as we are living in rented accommodation at present.'

'Housing boom over' as UK bank chaos grows,
O,
16.9.2007,
https://www.theguardian.com/money/2007/sep/16/
houseprices.business

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