US Housing/Banks Deal?

Sydney, Mar 7, 2008 (ABN Newswire) - Bankruptcies in the US rose by almost 30% last month; people in the housing foreclosure process were 97% above January 2007, jingle mail is no longer someone making a poor Christmas joke: it's the sound of letters being delivered to American banks with home keys inside after people have walked away rather than stay and watch the value of their houses, units, flats, etc drop any further.

The amount of equity Americans have in their homes fell below 50% at the end 2007, according to figures from the US Federal Reserve. It was the first time this is happened since 1945.

Like the subprime collapse and foreclosure 'boom', the rising tide of bankruptcies has spread across the US, but remains heaviest in California, Florida and several other states where the housing slide is deepest.

The US Federal Reserve, in its latest anecdotal update on US economic activity (called The Beige Book for the colour of its cover) said economic growth had slowed in eight of 12 US regions since the start of the year, hurt by faltering retail sales and manufacturing and a continued decline in housing.

"Two-thirds of the districts cited softening or weakening in the pace of business activity, while the others referred to subdued, slow or modest growth.

"Retail activity in most districts was reported to be weak or softening; manufacturing was said to be sluggish or to have slowed in about half the districts.''

Housing remained a drag on the US economy with the report saying: residential real estate markets generally remained weak, with tight or tightening credit standards'' in most districts.

It is no longer some academic debate over what a recession is: it's now a case that the US is almost there, and is being dragged under by the deepening housing crisis.

Fed Chairman Ben Bernanke showed this week how seriously he sees the problem by proposing, no urging, US banks and financial groups to adopt some radical steps to try and stop the slide.

His comments to a banking conference in Florida have lifted the chances of the US Government, the US Federal Reserve and other regulators finally coming up with an offer that the US banking and finance industry won't be able to refuse for helping the struggling housing sector.
It will be costly, probably involved all sorts of accounting, tax and regulator sleights of hand to allow it to happen, but it will happen.

There seems to be a growing realization (especially in an election year) that the problems to be caused by the slide in house prices, will be too great for even the US economy and financial system to bear.

There is now a very real concern that as house prices fall, the level of equity buyers have in their homes is destroyed, and that after a while the equity of the lender is cut. The present system of foreclosure and repossession blows enormous holes in the equity levels of US banks and lenders. What Breanne is saying to them is 'look at ways of limiting the slump in housing prices; otherwise you will pay as well as the borrower'.

US media and economic commentators say the Bush Administration and the Federal Reserve are slowly moving toward some sort of rescue arrangement of distressed homeowners and mortgage lenders.

That will be the important thing to keep in mind: the US banking and mortgage industry will need as much government help (non financial, mostly regulatory) to stop millions of more people being added to around four million who have already been hurt by the loss of their homes in the past year or so.

So far all the stimulation and rescue packages have involved tinkering at the edges with too many rules that restrict the aid to those who don't need it most.

Fed chairman Ben Bernanke's comments at that Florida bankers' conference has started speculation of a deal.

He told his audience "more can and should be done" to help millions of people with mortgages that are often bigger than the value of their homes.

He didn't go so far as to call for a government driven bailout, but he did push the banking industry into thinking about forgiving portions of many mortgages, and he did so with his toughest warning so far about the potential problems a deepening in the housing crisis might cause.

He signalled his concern that market forces would not be enough to prevent a broader economic calamity.

"Delinquencies and foreclosures likely will continue to rise for a while longer,'' Bernanke said in his speech.

He said a surplus of homes for sale indicates "further declines in house prices are likely". That surplus grows every month of existing and newly finished homes, townhouses and apartments.

He told the conference that subprime borrowers are about to see their mortgage rates increase more than 1% under reset provisions in mortgages. This is expected to push more people towards foreclosure as the value of their homes falls below what they owe.

"Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest-rate resets will nevertheless impose stress on many households.''

In fact mortgage rates have hardly reacted to the Fed rate cuts as banks tighten their lending criteria more and more, restricting home loans (and business loans) to people and companies were (what) top level credit.

Bernanke said that in the past people would merely refinance a loan when the rate was reset higher (postponing the day of reckoning if you like), but he says that option has now 'largely'' gone because sales of bonds backed by subprime mortgages "have virtually halted" (as they have done here for better quality mortgages from our bankers and non bank lenders).

And, as we have noted in the past, central banks often send people out in twos to make a point and the Fed was no different with Vice Chairman Donald Kohn having his own warning ready.

He indicated the Fed and others were considering whether "we have adequate insurance'' against the risks of a deeper downturn in growth. He also repeated calls for banks to raise capital, and added that they ought to review their dividend plans.

Bernanke also said that home lenders tell us that they are reluctant to write down principal. They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.

The Fed chairman says that by reducing the amount of the loan, this "may increase the expected payoff by reducing the risk of default and foreclosure''. He also urged investors in mortgage bonds to accept "short payoffs'' of loans by allowing borrowers to refinance at a lower principal.

Mr Bernanke made the point in his speech that negative equity could be the biggest threat of all.

He said the recent surge in delinquencies (as measured by RealtyTrac in January was up 97% on a year ago) had been "closely linked'' to the slide of home equity.

He also suggested that the Federal Housing Administration expand its insurance program to let more people switch from expensive subprime mortgages to federally insured loans.

Mr Bernanke said that the two government-sponsored mortgage companies, Fannie Mae and Freddie Mac should raise more capital so they could buy more mortgages to add to the $US1.5 trillion in mortgages. But they are both struggling with huge losses of their own from poor lending and investment decisions.

Greater involvement by the US Government through these two organisations and the Federal Housing Administration has been proposed by various members of the Bush Administration: increasing the limit on loans (so called Jumbo mortgages) that Freddie Mac and Fannie Mae can insure.

A month ago, President Bush signed an economic stimulus package which greatly increased the size of loans the F.H.A. can insure, while allowing Fannie Mae and Freddie Mac to purchase significantly larger mortgages from lenders and guarantee them against default by homeowners.

The move, which administration officials had previously opposed, increases the limits on F.H.A., Freddie Mac and Fannie Mae mortgages from $417,000 to as much as $729,750.

Historically, the F.H.A. and the mortgage companies have focused on conservative mortgages for people borrowing relatively small loans, but they are now being encouraged to finance much bigger mortgages, in some cases to people who put almost no money down, the so-called subprime mortgage.

Last week, the Bush administration went further by removing the limits on the volume of mortgages that Fannie Mae and Freddie Mac can hold in their own portfolios. That means the two companies could buy billions of dollars in mortgages that other investors won't touch.

In theory, the changes should not cost taxpayers. But because the companies are backed by Congress, investors have assumed that Congress would bail them out if needed. Fannie Mae and Freddie Mac can borrow money more cheaply than private banks largely because of that assumed government backing.

Besides cutting interest rates, the Fed has been offering pumping money (around $US160 billion) into US financial markets and leaving it there for up to a month and accepting mortgage backed securities as collateral, even ones not tradable in the current credit crunched environment.

The Federal Housing Administration has insured 110,000 mortgage refinancing worth $US15 billion since it started a new program last October. Many are said to have been former subprime borrowers.

The final part of the deal will be an even-handed and softly softly approach on bank capital requirements and even the tax deductibility of principal write-downs.

That would require a lot of co-operation between lenders, auditors, regulators state and federal and even bank analysts. Ratings agencies would have to agree, but seeing they played a major and still unaccounted for part in the mess in the way they rated dodgy loan portfolios Triple A, you'd think they would do anything to make themselves look good.

Investors might have to turn a blind eye to bank 'earnings' that may not be the real McCoy for a couple of years while the restructuring of the housing sector happens, but that would be better than the collapse of one or two really big banks.

Why do you think Citigroup traded at a nine year low Tuesday of just over $US21 a share, before edging higher? A major shareholder who paid a lot more than that, (The Dubai Investment Corporation) believes the giant bank needs more capital.

Citigroup is a major player in so many parts of the markets, especially housing, so the market is taking a jaundiced view of its future.

And this will be done just to save housing from a depression. Corporate debt in the form of junk bonds, financing of hedge funds and private equity deals, bond insurance, credit default swaps and the like won't get a look in, nor will many of the dead credit derivatives that were backed by subprime mortgages that have now collapsed.

Remaining credit derivatives backed by surviving bonds may be partially saved, but the rest of the loan books of banks to big investors and business will languish. And the screams will be loud and long.


 

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