Sep
30
A closely watched index shows home prices tumbling by the sharpest annual rate ever in July, but the rate of decline is slowing.
The Standard & Poor’s/Case-Shiller 20-city housing index released Tuesday fell a record 16.3 percent in July from the year-ago period, the largest drop since its inception in 2000. The 10-city index plunged 17.5 percent, its biggest decline in its 21-year history.
Home values in all 20 cities fell year-over-year, with Las Vegas prices plunging the most at nearly 30 percent.
However, the pace of declines has slowed over the last three months, but there is still no sign of a bottom, one of the index creators said.
Sep
26
The Credit Crunch: Loans out of Reach
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The market meltdown has caused banks big and small to tighten their credit standards, making it tougher to get loans for a home, car and even college.
NEW YORK (CNNMoney.com) — Interest rate spreads. Libor. Collateralized debt obligations.
Unless you’re fluent in the language of high finance, it’s tough to make heads or tails of all the terms being tossed around in the headlines lately.
Simply put, the meltdown on Wall Street has made it tough for many Americans to get a loan to buy a home, purchase a car, start a business or even send a kid to college.
And with all the talk of a credit crunch — some are even calling it a credit freeze — it may get even tougher.
But instead of relying on arcane numbers to show that banks are more reluctant to lend to you and me, as well as to each other, we decided to speak to banking executives and have them explain how their lending standards have changed.
The financial turmoil is affecting banks of all sizes — from rural community banks to one of the nation’s largest banking giants. Here’s how.
The littlest guys are still lending
While the credit crisis has shaken Wall Street to its core, the thousands of community banks that make up the lion’s share of the nation’s banking system remain, to a large extent, quite secure.
“Our lending window continues to remain open,” said Jonathan Fox, the chairman and CEO of The Fowler State Bank, a Colorado-based bank an hour’s drive from Pueblo with about $56 million in assets.
Fox admitted that, since the credit crunch began, his bank has taken a harder look at the value of a piece of real estate involved in a loan as well as a customer’s income.
But he said that his bank, which traces its roots back to 1899, can continue to lend freely because they didn’t get caught up in the subprime mortgage market.
Fowler is not unique in this regard either.
Karla Wilbur, a senior vice-president at Passumpsic Savings Bank in St. Johnsbury, Vermont, said that an existing customer with a good credit standing and steady income who applies for a home equity loan could very well qualify for it.
She said the 11-branch bank, which serves towns along the Vermont-New Hampshire border, has ratcheted back on some of its non-core loan business — such as buying loans from car dealerships or doing joint commercial loan deals with other banks.
But she added that the bank’s consumer lending business hasn’t been affected all that much following the panic that spread through the credit markets last week.
“It pretty much looks like it did a month ago or two months ago,” said Wilbur. “Things haven’t changed a lot.”
Regional banks tightening their standards
It may still be business as usual for customers of small banks. But the higher up in the bank food chain you go, the tougher it seems to get credit.
At larger institutions, such as the San Francisco-based Bank of the West, which has approximately 700 branches mostly west of the Mississippi River, consumers need a better credit score than they did before the credit crunch hit.
“We have seen a change in the landscape and responded to it,” said Bruce Heysse, an executive vice president for Bank of the West’s consumer lending business.
Consumers whose credit rating teeters between ‘good’ and ‘not so great’ are the ones getting squeezed the most, added Carole Merchant, a fellow Bank of the West executive vice president in the company’s indirect lending business.
“Will loans be available for people who have some sort of credit blemish? That will probably remain more difficult,” said Merchant.
Given the current state of the economy, banks such as the San Antonio, Texas-based Cullen/Frost (CFR), have been forced to withdraw lines of credit from some customers.
Still, the lending spigot hasn’t been completely shut off. Instead, Dick Evans, chairman and CEO of Cullen/Frost, said that his bank is charging customers higher rates for loans than they did before.
“We have tightened from the standpoint that we get paid for the risk,” said Evans, whose bank focuses primarily on business lending and had more than $13 billion in assets as of the end of last year.
Turmoil at the top of the heap
Finally, customers of big banks may face the toughest time getting approved for new loans.
As home values continue to sink across the country, borrowers looking to get home equity loans are finding they are limited in how much they can borrow against their home. That’s especially true at many of the nation’s biggest banks, such as Citigroup (C, Fortune 500), Washington Mutual (WM, Fortune 500) and Wachovia (WB, Fortune 500), which have been hit hardest during the mortgage meltdown.
But even JPMorgan Chase (JPM, Fortune 500), which has emerged as one of the strongest banks in the wake of the credit crisis, is taking a closer look at borrowers as well.
Tom Kelly, a spokesperson for the New York City-based bank, acknowledged that the company has had to tighten lending standards over the past year.
“Last month, a student who was looking for a college loan qualified with a co-signer,” he said. “A year ago that student, with a marginal credit history might have qualified on their own.”
Experts are hopeful that banks will become more comfortable lending more freely again if the $700 billion bailout package, which is currently being hashed out on Capitol Hill, is approved.
But until then, it will continue to be tough for many Americans to get new loans from banks.
Sep
26
Washington Mutual Inc was closed by the U.S. government in by far the largest failure of a U.S. bank, and its banking assets were sold to JPMorgan Chase & Co for $1.9 billion.
Thursday’s seizure and sale is the latest historic step in U.S. government attempts to clean up a banking industry littered with toxic mortgage debt. Negotiations over a $700 billion bailout of the entire financial system stalled in Washington on Thursday.
Washington Mutual, the largest U.S. savings and loan, has been one of the lenders hardest hit by the nation’s housing bust and credit crisis, and had already suffered from soaring mortgage losses.
Washington Mutual was shut by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. This followed $16.7 billion of deposit outflows at the Seattle-based thrift since Sept 15, the OTS said.
“With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,” the OTS said.
Customers should expect business as usual on Friday, and all depositors are fully protected, the FDIC said.
FDIC Chairman Sheila Bair said the bailout happened on Thursday night because of media leaks, and to calm customers. Usually, the FDIC takes control of failed institutions on Friday nights, giving it the weekend to go through the books and enable them to reopen smoothly the following Monday.
Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The largest previous U.S. banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.
JPMorgan said the transaction means it will now have 5,410 branches in 23 U.S. states from coast to coast, as well as the largest U.S. credit card business.
It vaults JPMorgan past Bank of America Corp to become the nation’s second-largest bank, with $2.04 trillion of assets, just behind Citigroup Inc. Bank of America will go to No. 1 once it completes its planned purchase of Merrill Lynch & Co.
The bailout also fulfills JPMorgan Chief Executive Jamie Dimon’s long-held goal of becoming a retail bank force in the western United States. It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price through a government-financed transaction.
On a conference call, Dimon said the “risk here obviously is the asset values.”
He added: “That’s what created this opportunity.”
JPMorgan expects to incur $1.5 billion of pre-tax costs, but realize an equal amount of annual savings, mostly by the end of 2010. It expects the transaction to add to earnings immediately, and increase earnings 70 cents per share by 2011.
It also plans to sell $8 billion of stock, and take a $31 billion write-down for the loans it bought, representing estimated future credit losses.
The FDIC said the acquisition does not cover claims of Washington Mutual equity, senior debt and subordinated debt holders. It also said the transaction will not affect its roughly $45.2 billion deposit insurance fund.
“Jamie Dimon is clearly feeling that he has an opportunity to grab market share, and get it at fire-sale prices,” said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. “He’s becoming an acquisition machine.”
BAILOUT UNCERTAINTY
The transaction came as Washington wrangles over the fate of a $700 billion bailout of the financial services industry, which has been battered by mortgage defaults and tight credit conditions, and evaporating investor confidence.
“It removes an uncertainty from the market,” said Shane Oliver, head of investment strategy at AMP Capital in Sydney. “The problem is that markets are in a jittery stage. Washington Mutual provides another reminder how tenuous things are.”
Washington Mutual’s collapse is the latest of a series of takeovers and outright failures that have transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.
These include the disappearance of Bear, government takeovers of mortgage companies Fannie Mae and Freddie Mac and the insurer American International Group Inc, the bankruptcy of Lehman Brothers Holdings Inc, and Bank of America’s purchase of Merrill.
JPMorgan, based in New York, ended June with $1.78 trillion of assets, $722.9 billion of deposits and 3,157 branches. Washington Mutual then had 2,239 branches and 43,198 employees. It is unclear how many people will lose their jobs.
Shares of Washington Mutual plunged $1.24 to 45 cents in after-hours trading after news of a JPMorgan transaction surfaced. JPMorgan shares rose $1.04 to $44.50 after hours, but before the stock offering was announced.
119-YEAR HISTORY
The transaction ends exactly 119 years of independence for Washington Mutual, whose predecessor was incorporated on September 25, 1889, “to offer its stockholders a safe and profitable vehicle for investing and lending,” according to the thrift’s website. This helped Seattle residents rebuild after a fire torched the city’s downtown.
It also follows more than a week of sale talks in which Washington Mutual attracted interest from several suitors.
These included Banco Santander SA, Citigroup Inc, HSBC Holdings Plc, Toronto-Dominion Bank and Wells Fargo & Co, as well as private equity firms Blackstone Group LP and Carlyle Group, people familiar with the situation said.
Less than three weeks ago, Washington Mutual ousted Chief Executive Kerry Killinger, who drove the thrift’s growth as well as its expansion in subprime and other risky mortgages. It replaced him with Alan Fishman, the former chief executive of Brooklyn, New York’s Independence Community Bank Corp.
WaMu’s board was surprised at the seizure, and had been working on alternatives, people familiar with the matter said.
More than half of Washington Mutual’s roughly $227 billion book of real estate loans was in home equity loans, and in adjustable-rate mortgages and subprime mortgages that are now considered risky.
The transaction wipes out a $1.35 billion investment by David Bonderman’s private equity firm TPG Inc, the lead investor in a $7 billion capital raising by the thrift in April.
A TPG spokesman said the firm is “dissatisfied with the loss,” but that the investment “represented a very small portion of our assets.”
DIMON POUNCES
The deal is the latest ambitious move by Dimon.
Once a golden child at Citigroup before his mentor Sanford “Sandy” Weill engineered his ouster in 1998, Dimon has carved for himself something of a role as a Wall Street savior.
Dimon joined JPMorgan in 2004 after selling his Bank One Corp to the bank for $56.9 billion, and became chief executive at the end of 2005.
Some historians see parallels between him and the legendary financier John Pierpont Morgan, who ran J.P. Morgan & Co and was credited with intervening to end a banking panic in 1907.
JPMorgan has suffered less than many rivals from the credit crisis, but has been hurt. It said on Thursday it has already taken $3 billion to $3.5 billion of write-downs this quarter on mortgages and leveraged loans.
Washington Mutual has a major presence in California and Florida, two of the states hardest hit by the housing crisis. It also has a big presence in the New York City area. The thrift lost $6.3 billion in the nine months ended June 30.
“It is surprising that it has hung on for as long as it has,” said Nancy Bush, an analyst at NAB Research LLC.
Sep
25
New home sales tumbled in August to the slowest pace in 17 years, while the average sales price fell by the largest amount on record, demonstrating the depth of the problem that Washington is trying to solve.
New home sales tumbled in August to the slowest pace in 17 years, while the average sales price fell by the largest amount on record, demonstrating the depth of the problem that Washington is trying to solve.
The Commerce Department said Thursday that new homes sales fell by 11.5 percent in August to a seasonally adjusted annual sales rate of 460,000 units, the slowest sales pace since January 1991.
It was a much bigger sales decline than the small 1 percent drop that economists had been expecting. The average price of a new home sold in August dropped by a record amount of 11.8 percent to $263,900, compared to the July average of $299,100. The median price was also down, falling 5.5 percent to $221,900.
The big drop in new home sales followed news Wednesday that sales of existing homes were down 2.2 percent in August to a seasonally adjusted annual rate of 4.91 million units. Both segments of the market remain under pressure from the steepest housing downturn in decades.
That housing slump has contributed to a record surge in mortgage defaults, leading to billions of dollars in losses by financial firms and spawning a severe credit crisis that is threatening to send the country into a steep recession.
In a nationally televised speech Wednesday night, President Bush said the credit crisis could trigger a “long and painful recession” unless Congress acts quickly to pass a $700 billion bailout plan for the nation’s financial system. Negotiations on that plan were continuing Thursday with expectations that an agreement would be reached soon.
Besides the weak housing report, the government said Thursday that new claims for unemployment benefits shot up last week to the highest level in seven years. Orders to factories for big-ticket manufactured goods fell by a much-bigger-amount than expected amount of 4.5 percent in August. Both indicate the rising pressures facing the economy.
The report on new home sales showed that business was off in every region of the country except the Midwest, which posted a 7.2 percent increase. Sales plunged by 36.1 percent in the West and were down 31.9 percent in the Northeast. Sales fell a more modest 2.1 percent in the South.
Sep
24
Existing Home Sales Sink Again
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Sales of homes by homeowners dropped in August as prices decline by 9.5% from a year earlier.
NEW YORK (CNNMoney.com) — Sales of existing homes fell in August, according to the latest reading on the battered housing market released Wednesday by an industry trade group.
The National Association of Realtors reported that sales by homeowners sank in August to an annual pace of 4.91 million, down 2.2% from the revised July reading of 5.02 million. It was the ninth month in a year in which the sales pace fell.
August sales were down 10.7% from a year earlier.
Economists surveyed by Briefing.com expected the report to show existing home sales slowed to an annual pace of 4.93 million.
“Home sales will be constrained without a freer flow of credit into the mortgage market,” said NAR chief economist Lawrence Yun. “The faster that happens, the sooner we’ll see a broad stabilization in home prices that in turn will help the economy recover.”
Home prices continue to decline as mortgage lending has been constrained amid the credit crisis. Some economists say the proposed $700 billion bailout package would help free up credit, allowing lenders to refinance loans of troubled borrowers.
Meanwhile, the median price of a home sold during the month – including single-family homes, townhomes, condominiums and co-ops – fell 9.5% to $203,100 from $224,400 a year ago. Before the start of the current housing slump, it had been 11 years since prices fell on a year-over-year basis.
The median price of a single-family home fell 9.7% from a year ago to $201,900. The trade group has tracked those sales prices going back to 1989.
The rate of existing home sales actually rose 0.5% in the South and 0.9% in the Midwest on a seasonally adjusted basis.
Sales in the Northeast fell 6.6%, and sales in the West dropped 5.3%. The West saw the largest decrease in sales, even as prices fell a whopping 23.9% from last year in that region.
Home prices fell in every region of the country. In the Northeast, prices declined 3.8% year-over-year, while the South saw a dip of 3.4%. Prices fell by 5.6% in the Midwest.
But even as sales dropped, the excess supply of homes on the market also fell a bit in August. Realtors estimated that there were 4.26 million homes available for sale, which represented an 10.4 month supply. That was down from the 10.9 month supply in July.
Sep
18
The Pain on Main Street
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Wall Street troubles send tremors through money market funds and mortgage lending. Banks hoard cash, making it even harder to get a loan.
NEW YORK (CNNMoney.com) — If you thought banks weren’t doling out much dough before, try getting a loan now.
The recent turmoil on Wall Street has frozen lending among banks, sending rates soaring and prompting financial institutions to hoard cash. The situation grew so dire that central banks in the United States, Europe and Japan were forced to inject tens of billions into the system in hopes of greasing the lending wheels.
Even if consumers have no direct dealings with the now-bankrupt Lehman Brothers or the now-bailed out American International Group, they may very well feel the ripple effects. The most evident impacts are rising mortgage rates and instability in once-safe money market funds. But the tensions on Wall Street will make it even harder for people – even those with good credit – to get a loan.
Consumers won’t be the only ones hurt. Businesses will also find it tough to get financing.
“The price of money has increased and the availability of financing has been impacted,” said Keith Gumbinger, vice president of HSH Associates, which tracks mortgage rates. “It’s pure volatility right now. There’s no way to know on any given day what’s going to happen in any given market.”
Mortgage rates soarMortgage rates jumped sharply on Wednesday, after falling more than a half-point after the federal government took over Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) on Sept. 7. Rates spiked to 6.11% Wednesday, up from 5.87% the day before, Gumbinger said.
In the wake of the government’s $85 billion rescue of crumbling insurer AIG, investors fled to the safety of Treasurys, freezing out mortgage-backed securities and sending rates soaring.
While rates remain below their summer highs, the spike is troubling. The economy needs low mortgage rates to stabilize the housing market, Gumbinger said. Higher rates make it harder for people to buy a home or to refinance into more affordable mortgages.
Money market funds shakyThe demise of Lehman Brothers and troubles at AIG (AIG, Fortune 500) have put stress on many money market funds, which invest in short-term debt issued by the federal government or by companies.
Putting money in these funds was thought to be as safe as money in the bank, and many people stash their extra cash in them.
But unlike money in the bank, these funds can lose value. Traditionally, financial institutions make sure that money market funds maintain their $1 per share value, but with this week’s turmoil, fund companies found themselves scrambling. Investors withdrew nearly $80 billion from money market funds on Wednesday alone, according to Peter Crane, founder of Crane Data, which tracks money market funds.
The Reserve Fund announced Tuesday that it had to cut the price of shares in its primary fund to 97 cents and investors who wanted to withdraw money would have to wait a week for the proceeds. Under siege from redemptions, Putnam Investments said Thursday it would close its institutional prime money market fund and return all proceeds to investors at $1 a share.
Meanwhile, other fund companies – including Wachovia’s Evergreen Investments and Frank Russell Funds – announced Wednesday that their parent companies would have to inject money into the accounts to maintain their $1-a-share value.
Most money market fund investors, particularly those whose holdings are at larger institutions, will not suffer losses, said Christine Benz, director of personal finance at Morningstar. Companies will step in to prop up the funds.
“Many firms that offer money market funds would face huge reputational risk if they allow them to break a buck,” she said.
While financial institutions are stepping in to prop up their funds now, they can’t do this indefinitely. Also, they may have to think twice about acting if the funds’ values fall too steeply.
Some people think they have money market funds, when they actually hold short-term bond funds. The value of these investments can fluctuate since they put their money in riskier assets.
But even true money market funds vary in their investments. Those that invest in safer Treasurys offer lower rates, while those in short-term corporate commercial paper have higher yields but are more likely to stumble, said Hildy Richelson, co-author of “Bonds: The Unbeaten Path to Secure Investment Growth.”
“If your money market fund is yielding more than others, then they are reaching in some way,” Richelson said.
Sep
14
The United States is mired in a “once-in-a century” financial crisis which is now more than likely to spark a recession, former Federal Reserve chief Alan Greenspan said Sunday.
The talismanic ex-central banker said that the crisis was the worst he had seen in his career, still had a long way to go and would continue to effect home prices in the United States.
“First of all, let’s recognize that this is a once-in-a-half-century, probably once-in-a-century type of event,” Greenspan said on ABC’s “This Week.”
Asked whether the crisis, which has seen the US government step in to bail out mortgage giants Freddie Mac and Fannie Mae, was the worst of his career, Greenspan replied “Oh, by far.”
“There’s no question that this is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go,” Greenspan said.
“And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes.
“That will induce a series of events around the globe which will stabilize the system.”
Greenspan was also asked whether the United States had a greater-than 50 percent chance of escaping a recession.
“No, I think it’s less than 50 percent.
“I can’t believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring.”
The former Federal Reserve chairman also predicted that the financial crisis would see the failure of more major financial institutions, even as embattled Wall Street investment giant Lehman Brothers scrambled to find a buyer.
“In and of itself that does not need to be a problem.
“It depends on how it is handled and how the liquidations take place. And indeed we shouldn’t try to protect every single institution.”
On Saturday, Democrat Barack Obama’s campaign seized on a warning from Greenspan about John McCain’s tax plans to portray the Republican as economically reckless.
In an interview with Bloomberg Television Friday, Greenspan said the nation could not afford 3.3 trillion dollars of tax cuts proposed by McCain without matching cuts in spending.
Greenspan, a long-time friend of McCain and a Republican, said about the Arizona senator’s plans to extend massive tax cuts imposed by President George W. Bush: “I’m not in favor of financing tax cuts with borrowed money.”
McCain has said he would pay for his cuts by ending pet funding projects for US lawmakers’ districts known as “earmarks.”
Sep
14
A lot of smart people have tried to call the bottom on Wall Street this year.
So far, they have all been wrong.
Since the financial crisis first hit in August 2007, markets – and the financial industry – have gone through a series of swoons, each more dizzying than the last.
Last week, the crisis reached a new pitch, as Lehman Brothers, the fourth-largest U.S. investment bank, struggled to avoid joining Bear Stearns on the trash heap, and shares of Washington Mutual, the largest savings and loan, fell briefly below $2.
Now even Wall Street’s professional optimists have given up predicting exactly when their industry might stabilize. One senior executive at a top investment bank suggested recently that there was no ending in sight to the crisis.
Until now, the cataclysm in the banking and securities industry has damaged but not derailed the rest of the economy. Economists generally predict that the United States will grow slowly over the next few months but avoid a deep recession, especially if oil prices fall farther, easing pressure on consumers, and exports remain strong.
But as the Wall Street crisis moves into its second year, the risks to the overall economy are increasing. The economy grew during the first half of the year, but businesses are cutting jobs and consumers are reducing spending. In August, the unemployment rate reached 6.1 percent, compared with 4.7 percent less than a year ago.
Until the worst turmoil on Wall Street ends, the economy will struggle, said Sung Won Sohn, an economist at California State University, Channel Islands, in Camarillo, California, who studies financial markets.
“Until and unless we have financial markets stabilize, I don’t think we will see a meaningful recovery in housing, and therefore in the economy,” Sohn said. He said he expected economic growth to remain close to zero through the middle of 2009 before finally beginning to accelerate.
Steven Wieting, the United States economist for Citigroup, said: “We’re describing the U.S. economy as recessionary.”
Wieting and other economists say that the Federal Reserve and the government have few good options left to ease the pressure on financial firms or the economy. The Fed has already cut short-term interest rates to 2 percent, below the rate of inflation, and the government has offered consumers and businesses $150 billion in tax rebates and cuts this year.
The Fed has also taken several measures to buoy the financial industry, such as allowing more banks access to low-interest, short-term loans. Yet Wall Street continues to struggle through the aftereffects of the biggest speculative bubble in history.
Financial services companies have cut more than 100,000 jobs this year, according to Challenger, Gray & Christmas, an executive placement firm, and deeper layoffs may come this fall.
Yet the picture may not be entirely bleak. When the chaos finally ends, Wall Street will almost certainly be smaller and more risk-averse. That change could eventually put the economy on firmer footing.
The crisis appears to mark the end of a bubble in the financial markets that has lasted nearly two decades. The speculation began in technology stocks in the 1990s and turned to real estate, commodities and private equity buyouts this decade. Along the way it powered the New York City economy and helped drive income inequality nationally.
While the stock market has not been as frenzied this decade as it was at the end of the 1990s, rampant speculation took over many other financial markets, Wieting said. “In the last couple of years, financial activity became less related than we’ve seen before to real economic developments,” he said.
Now Wall Street is reeling, as a significant fraction of the speculative real estate loans that banks made during the boom years are underwater. Because banks have limited capital to absorb losses, investors worry that those losses will overwhelm them.
The problem has been worsened by the financial instruments that banks hedge funds and insurance companies have created to swap loans and risk with one another. In theory, those products can help investors and companies diversify risk, but they are nearly impossible to value.
“Investors just don’t know what these assets are worth,” said Ed Yardeni, president of Yardeni Research. “There’s no transparency. It’s totally up to management to decide what these assets are worth and tell their accountants.”
For example, Lehman said last week that it had $20 billion in tangible equity- money that would theoretically be available to its shareholders if Lehman had to be liquidated. But those same shareholders valued Lehman at only $2 billion as of Friday, proof that they do not have confidence in the way Lehman has calculated its assets.
Now investors are demanding that banks like Lehman and Washington Mutual raise capital or sell their assets to raise cash and prove that they are solvent. But when banks are under pressure, they cannot easily find new investors or purchasers for their assets. It is as if a family were told to sell its home overnight, for cash, or lose it. The family would surely receive a far lower price than the property would generate in a more orderly sale.
So, one by one, the banks that took on the most risk are facing the real possibility of going under. Those with stronger balance sheets, such as Morgan Stanley, Goldman Sachs and JPMorgan Chase, are suffering much less.
For Wall Street, the lesson has been sobering – and unlikely to be forgotten for several years, said Sohn, the California State economist.
“The restraint in the credit markets will last quite some time,” Sohn said. In the mortgage business, which saw the worst excesses, loan practices may remain stricter for at least a decade, he said. The results will be both positive and negative, he said.
The speculation that has produced wide swings in commodities prices and vacant housing subdivisions across California and Florida may become less prominent. But people who want to buy homes may continue to struggle to get mortgages, even if they have excellent credit.
Companies that need loans to expand, or just to survive rough economic patches, will also have a harder time finding financing.
“We went overboard,” Sohn said. “As a result, the financial market is imposing some discipline on our behavior, and it’s painful. But that’s how the system works.”
Jared Bernstein, senior economist at the Economic Policy Institute, a liberal research group in Washington, said that, in a best-case outcome, greater risk aversion in the financial markets might eventually encourage the United States to rely less on bubbles and speculative lending to drive economic growth.
Instead, the government could pursue policies designed to drive wages higher for middle- and lower-class Americans, he said, allowing them to buy homes and cars without taking on ruinous debt.
“We have to find a new way – or maybe it’s an old way – to stimulate enough demand for the economy to do what it’s supposed to do without speculative excess,” Bernstein said. “A recovery that’s driven by more broadly shared prosperity, where consumption is fairly evenly shared through the economy, that kind of growth is more sustainable.”
Even so, Bernstein said he was not cheering Wall Street’s deep struggles. “The financials are the heart of the credit system, and credit is the lifeblood of our economy,” he said. “There’s no question that we will pay a cost in terms of much diminished growth if this continues.”
Sep
12
There were 304,000 homes in some stage of default last month, and 91,000 families lost their homes.
NEW YORK (CNNMoney.com) — Foreclosures hit another record high in August: 304,000 homes were in default and 91,000 families lost their houses.
More than 770,000 homes have been repossessed by lenders since August 2007, when the credit crunch took hold.
The report from RealtyTrac, an online marketer of foreclosures properties, is the latest in string of bad news for housing.
Foreclosure filings of all kinds, including notices of defaults, notices of auctions and bank repossessions, grew 12% in August over July, and 27% compared with August 2007.
The 27% jump over last August represents a more modest year-over-year increase than in previous months, but that’s only because the housing crisis was already underway in August 2007, which saw a big spike in foreclosures.
“In August 2008 the total number of U.S. properties that received foreclosure filings, as well as the national foreclosure rate, were both the highest we’ve seen in any month since we began issuing our report in January 2005,” RealtyTrac CEO James Saccacio said in a statement.
Fannie Mae (FNM, Fortune 500) chief economist Doug Duncan isn’t surprised by the swelling numbers. “It’s been my view for a long time that foreclosures won’t peak until the last three months of 2008,” he said.
And now that the nation in a recessionary economy, with job losses exceeding 400,000 a month, Duncan speculates that the foreclosure crisis may be drawn out even longer.
“We’ve been saying that the foreclosure trend has not yet peaked,” said Doug Robinson, a spokesman for the foreclosure prevention organization NeighborWorks America. “Before it was a subprime problem,” he said. “Now, it’s everybody’s problem.”
Putting filings on hold
The August figures would have been worse, had it not been for new legislation passed in several states, including Maryland and Massachusetts, designed to make lenders wait before filing notices of default.
In Massachusetts, for example, a 90-day waiting period went into effect on May 1. Every Massachusetts homeowner now has to be notified of their lenders’s intention to file a notice of default against them, and they get a 90 day window during which they can attempt to bring their payments up to date. Lenders are prohibited from filing a first notice of default until after that period.
The impact has been immediate. RealtyTrac recorded no new notices of initial default for the state during August. That helped drive down total foreclosure filings in the state by more than 46% compared with last year.
Other states didn’t fare as well. Nevada once again had the highest rate of filings in the nation. One of every 91 households, or 11,706 families, received a foreclosure notice of some kind during the month, and more than 4,000 others lost their homes.
More than 101,000 Californians received foreclosure notices, which comes to about one in every 130 households, while more than 33,000 people there lost their homes. Arizona had the third-highest rate with one out of every 182 households in default.
All of these states saw tremendous home price run-ups during the boom, which meant that many buyers had to use exotic, risky loans in order to be able to afford a home. These mortgages include subprime, hybrid adjustable rate mortgages (ARMs) that feature two or three years of low introductory rates before the loans reset to higher, often unaffordable levels and cause borrowers to default.
In some of the other hard hit states, such as Michigan (which had one filing for every 332 households) and Ohio (one filing per 444 households), which never saw a housing boom, delinquencies are being driven by fundamental economic woes like unemployment, rather than pricey real estate.
Eight of the top 10 worst performing metro areas were in California. Stockton, in the Central Valley, had the highest rate in the nation with one in every 50 households receiving a foreclosure filing during the month.
“You go up and down the central part of [California] and that’s where you’re seeing the carnage,” said Rick Sharga, RealtyTrac’s director of marketing. Home sales are actually up in many of these cities, the prices have dropped, often precipitously. “What’s selling is the bank owned properties,” he said.
Sep
12
The Dollar’s Shining Moment
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The buck’s role as safe-haven currency stands out in a dim U.S. and global financial landscape.
NEW YORK (Fortune) — Americans unsettled by a dour economic outlook might take some consolation from a most unexpected source: the rejuvenation of the beaten-down dollar.
After six years of steady decline, the U.S. currency is on a major upswing, fueled by fears of a global recession and a meltdown in financial markets.
The New York dollar index, a measure of the dollar’s value against the currencies of major trading partners, is up 14% off an all-time low set in the Bear Stearns panic.
The rally against the euro is even more striking: Just two months after it bottomed out at $1.60 to the euro, the dollar has jumped 13% against the European currency.
The reversal has been driven by a souring global economic picture and the flight of investors to safe U.S. Treasury securities from riskier assets such as stocks, corporate bonds and property.
The dollar’s renaissance is particularly remarkable, given that it comes as an already deeply indebted nation prepares to take on additional obligations in support of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). The move has taken market watchers by storm.
“The speed of the rally has been really striking,” says Rebecca Patterson, global head of foreign exchange at J.P. Morgan’s Private Bank. She said she has been surprised at the currency’s steady rise in recent months, though she notes that many of the gains have come during August and September, which are traditionally volatile months in the currency markets.
Worries are bigger elsewhere
Even so, the shift is remarkable because it comes as the U.S. economic outlook seems to dim by the hour. House prices are tumbling, joblessness is rising and the wheels are coming off the financial sector.
Last weekend the government effectively nationalized the mortgage business, via planned purchase of preferred stock in Fannie and Freddie, in a bid to quell worries stemming from the creaking housing market.
Since then, though, shares in firms such as Lehman Brothers (LEH, Fortune 500) and Washington Mutual (WM, Fortune 500) have gone into free fall, amid questions about their ability to raise new capital to offset mortgage-related losses.
Yet investors in currency markets are now focusing on the increasingly gloomy view overseas. The global growth story that appeared robust only six months ago now appears much less compelling.
National output declined in the second quarter in Europe, the U.K. and Japan, and central bankers in New Zealand this week made a deeper-than-expected cut in their policy rate in a bid to steer clear of recession. The prices of commodities such as oil, gold and grains are in free fall, signaling weakening demand even in fast-growing nations like China.
Currency traders are now betting those trends will have central bankers in other developed nations cutting interest rates, as much as they might prefer not to with inflation readings uncomfortably high.
Safe haven once again
“The dollar takes on the role of a safe haven currency,” writes CMC Markets currency strategist Ashraf Laidi, “as U.S. authorities have undertaken the most measures in stemming the deepening slowdown.”
And if U.S. growth prospects appear dim for the moment – Laidi expects the Fed to resume cutting interest rates as early as the fourth quarter, as financial sector weakness further impairs the rest of the economy – many of the worst-case scenarios that might presage a deeper dollar decline have failed to manifest themselves.
Patterson notes that even in August, as foreign central banks became net sellers of agency securities – those issued by Fannie, Freddie and the Federal Home Loan Banks – they increased their purchases of Treasury bonds, according to data from the Federal Reserve Bank of New York.
“Capital flows remain strong,” she says. That’s important because the U.S. needs to import billions of dollars in overseas capital every day. The current account deficit, the broadest measure of trade, was $176 billion in the first quarter, or 5% of gross domestic product, the Commerce Department said in June.
That said, while the prospect of rate cuts in Europe should mean the dollar remains strong in coming months, Patterson says she believes the currency is due for a round of profit-taking, at least.
A dollar selloff could be triggered by good news from emerging markets, she says, which might prompt Americans to invest more overseas, or by a spike in the price of oil. And the threat that foreign suppliers of credit to the U.S. economy might demand higher interest rates remains ever present.
What’s certain is that with the U.S. consumer retrenching after years of driving global growth, currency markets aren’t the only place where it’s a challenge to sort out all the moving parts.
When investors start figuring out how the parts of a rebalanced global economy might fit together, good news beyond a bounce in the dollar may finally come into view.
“It was once understood that the way the world works, in extremis, is that the U.S. taxpayer is there as buyer of last resort,” economist Jim Griffin writes in the ING Investment Weekly. “When we can come to understand the way the world works when U.S. financial limits are approached, it may then be possible to lift this morose market mood.”