6-7-09

 
6-7-09
Badlands Journal
Baker's common sense economic journalism...Badlands Journal editorial board
http://www.badlandsjournal.com/2009-06-06/007256
Dean Baker has always been good at explaining in terms of common sense why the speculative housing boom was extremely dangerous and completely unsustainable. By "common sense," we mean that Baker has covered this story for years using his training as a professional economist, using facts instead of advertising or blind academic free-market dogma, and bringing to his stories a humane perspective grounded in what all this means to ordinary working people.
Badlands Journal editorial board
June 3, 2009
CounterPunch.com
Cheerleading the Recovery
Reporters With Pom-Poms By DEAN BAKER
http://www.counterpunch.com/baker06032009.html
Last week we got a whole series of bad reports on the state of the economy. New and existing home sales both remain near their lowest level for the downturn, as house prices continue to drop at the rate of 2.0 percent a month. New orders for capital goods, a key measure of investment demand, fell by 2.0 percent in April. Excluding the volatile transportation sector, new orders were still down by 1.5 percent.
On Friday, the Chicago Purchasing Managers Index fell by more than 5 percentage points from its April level, approaching its low for the downturn. The employment component of the index did hit a new low.
These reports might have led to gloomy news stories, but not in the U.S. media. The folks who could not see an $8 trillion housing bubble are still determined to find the silver lining in even the worst economic news.
For example, National Public Radio told listeners that the new home sales figure reported for April was up from the March level . While this was true, the April figure was only 1,000 higher than a March level that had just been revised down by 5,000. April new home sales were 4,000 below the sales level that had originally been reported for March. USA Today touted a “surge” in durable goods orders, which was also based on a sharp downward revision to the prior month’s data.
The media have obviously abandoned economic reporting and instead have adopted the role of cheerleader, touting whatever good news it can find and inventing good news when none can be found. This leaves the responsibility of reporting on the economy to others.
Any serious examination of the data shows that recovery is nowhere in sight. The basic story of the downturn is painfully simple. We have seen a collapse of a housing bubble which has devastated the construction sector and also caused consumption to plunge.
The construction sector is suffering from the enormous overbuilding during the bubble years. Measured in months of sales, the inventories of both new and existing homes are close to double their normal levels. This inventory will ensure that construction remains badly depressed at least through 2010, if not much longer.
The plunge in house prices has send consumption plummeting. The problem is not consumer attitudes, as many commentators seem to believe. Rather, the reason that most homeowners aren’t buying a lot right now is the same reason that homeless people don’t buy a lot of things: they don’t have the money.
The decline in house prices since the peak in 2006 has cost homeowners close to $6 trillion in lost housing equity. In 2009 alone, falling house prices have destroyed almost $2 trillion in equity. People were spending at an incredible rate in 2004-2007 based on the wealth they had in their homes. This wealth has now vanished.
Housing is weak and falling, consumption is weak and falling, new orders for capital goods in April, the main measure for investment demand, is down 35.6 percent from its year ago level. And, state and local governments across the country, led by California, are laying off workers and cutting back services.
If there is evidence of a recovery in this story it is very hard to find. The more obvious story is one of a downward spiral as more layoffs and further cuts in hours continue to reduce workers’ purchasing power. Furthermore, the weakness in the labor market is putting downward pressure on wages, reducing workers’ purchasing power through a second channel.
Happy talk will not turn this economy around. The economy needs more demand, which can only be provided by another larger dose of stimulus from the federal government. There are easy, quick, and effective ways to boost the economy with additional stimulus.
First, let’s give more money to state and local governments so that they don’t have to lay off workers, cut back services and raise taxes. This should be a complete no-brainer since this spending will immediately boost the economy.
The government could also provide a large boost to the economy by jump-starting health care reform with an employer tax credit (e.g. $2,500 per worker) for firms who do not currently provide coverage. This could quickly get us to near universal coverage as Congress worked to restructure the system to contain costs.
It could also provide a $2,500 tax credit to employers for giving workers paid time off. This should both increase demand in the economy and provide workers with more leisure and flexibility at the workplace.
There are other ways in which the government could quickly generate new demand, but these will not be seriously discussed until there is more general recognition that additional stimulus is needed. At some point it will be impossible to conceal the bad news and Congress’ attention will return to stimulus. But the media’s reality defying happy talk on the economy is delaying this moment.
6-4-09
Merced Sun-Star
Our View: We can afford to buy a house again
http://www.mercedsunstar.com/181/v-print/story/881443.html
Sharp decline in home prices no panacea, but it can be a good thing.
A silver lining in the foreclosure crisis is that Merced County once again has become a place where most families can afford to buy a home.
According to national home affordability statistics released recently, Merced County's median-income families can afford to buy more than 80 percent of the houses on the market today.
The reason, of course, is not that family incomes have risen, but that housing prices have dropped so dramatically -- which is discouraging to people trying to sell and depressing to those who owe more than their homes are worth.
But think about it: In 2005, only 3 percent of houses were affordable to average-income families. Many people were squeezed out of the market.
Other people did buy -- but shouldn't have. They started spending too much of their monthly income on housing and/or fell for subprime loans and other shaky deals that have led to today's housing mess.
To restart the housing market, the state and federal governments initiated income tax credits for homebuyers.
In addition, some first-time buyers may be eligible for down payment assistance programs. Put all of this together with low mortgage rates and it's obvious that housing truly is far more affordable.
In fact, Merced County now has one of the highest affordability rates in the state, right up there with Stanislaus and San Joaquin counties.
The sharp decline in home prices is not a panacea for the many economic ills of today...
But being an affordable place to buy a home is a very good thing.
And it's good for morale and consumer confidence that Merced County ranks near the top of a list rather than at or near the bottom of one, as all too often has been the case.
6-4-09
CNN Money
Most over- and under-valued housing markets
Low prices bring investors back into many markets...Les Christie
http://money.cnn.com/2009/06/04/real_estate/home_affordability_
soaring/index.htm
CNN Money
...10 Most Undervalued
Home prices in these cities are well below normal.
Metro area Median home price %Undervalued
Vero Beach, Fla. $125.4 -42.5%
Houma, La. $113.5 -41.4%
Las Vegas, Nev. $140.0 -40.9%
Merced, Calif. $106.0 -40.1%
Cape Coral, Fla. $119.5 -39.1%
Houston, Tex $119.8 -36.9%
Midland, Tex. $126.7 -34.8%
Lafayette, La. $125.3 -34.4%
Vallejo, Calif. $196.3 -34.3%
Stockton, Calif. $144.0 -34.3%
Source:IHS Global Insight

6-3-09
CNN Money
13 cities post unemployment higher than 15%
93 metro areas at 10% or more. Rates rise year-over-year in all 372 metropolitan areas for fourth consecutive month...Julianne Pepitone
http://money.cnn.com/2009/06/03/news/economy/metropolitan_
area_unemployment/index.htm
...Nationwide Unemployment - High
Top 5 cities with the highest unemployment rate in April 2009.
1. El Centro, Calif. 26.9%
2. Yuma, Ariz. 20.3%
3. Merced, Calif. 18.3%
4. Yuba City, Calif. 18.2%
5. Elkhart, Ind. 17.8%
Source:Bureau of Labor Statistics
6-5-09
Sacramento Bee
Jobless rate hits 9.4 percent in May; layoffs slow...JEANNINE AVERSA , AP Economics Writer
http://www.sacbee.com/business/nation/v-print/story/1922142.html
WASHINGTON -- With companies in no mood to hire, the unemployment rate jumped to 9.4 percent in May, the highest in more than 25 years. But the pace of layoffs eased, with employers cutting 345,000 jobs, the fewest since September.
The much smaller-than-expected reduction in payroll jobs, reported by the Labor Department on Friday, adds to evidence that the recession is loosening its hold on the country. It marked the fourth straight month that the pace of layoffs slowed...
6-3-09
CNN Money
Mortgage applications sink
As rates jump, home refinancing demand drops off, according to a report from the Mortgage Bankers Association.
http://money.cnn.com/2009/06/03/real_estate/mortgage_
applications.reut/index.htm?postversion=2009060310
NEW YORK (Reuters) -- U.S. mortgage applications fell last week, reflecting a plunge in demand for home refinancing loans as interest rates surged to their highest levels since late January, data from an industry group showed on Wednesday...
Interest rates, however, were well below year-ago levels of 6.17%...
However, demand for home purchase loans, an indicator of home sales, rose last week. The increase may help gauge how the hard-hit U.S. housing market is faring this spring, the peak home buying season.
The MBA's seasonally adjusted purchase index rose 4.3% to 267.7, its highest level since the week ended April 3...
Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pa., said government policies are helping to stabilize the housing market but does not expect much of a rebound this year or even in the first half of next year.
"Prices will continue falling because of foreclosures," she said. "Without policy, conditions would be even worse."
"Mortgage rates are rising again, but the Fed's intention is to keep them low, so it will likely take steps to do so," she said.
Fresno Bee
Valley loses clout in Legislature
Region of 4 million people lacks key voice on budget....E.J. Schultz, Bee Capitol Bureau
http://www.fresnobee.com/local/v-print/story/1454641.html
SACRAMENTO -- A special committee this month is making key decisions on solving the state's budget crisis -- without representation from the San Joaquin Valley. And as the "Big Four" legislative leaders confer on the state's fiscal choices, they, too, lack a Valley voice.
Has the region lost whatever clout it once had in Sacramento?
Only a few months ago, two of the Valley's representatives played key roles. But that changed in the aftermath of the last budget deal in February, when Republicans Dave Cogdill of Modesto and Mike Villines of Clovis were pushed out of Big Four leadership roles by conservative colleagues upset with their votes for new taxes.
They were replaced by Republicans from the Central Coast and Inland Empire. The Valley took another hit when none of the region's 15 lawmakers was able to secure a spot on the Senate-Assembly Budget Conference Committee. The panel is voting on budget proposals that will later be presented to the full Legislature.
The committee is a select group, just 10 of the Legislature's 120 members. Still, including the Big Four -- the party leaders in the two houses -- lawmakers with budget leadership roles come from districts that touch 24 of the state's 58 counties. Almost all major regions are represented, except the Valley, which is home to nearly 4 million people from San Joaquin to Kern counties.
Fred Silva, an adviser for California Forward, a bipartisan political reform group, said the committee make-up follows a trend of less emphasis on regions and more on ideology.
Legislative leaders are more apt to give key posts to members who agree with them philosophically rather than balancing representation across the state, he said.
"There's a danger when the emphasis is more ideological than it is to focus on the vibrancy of California regions, whether it's the Valley or it's Southern California," said Silva, a former top legislative budget consultant for Democrats.
Pete Weber, a civic leader in Fresno, said the massive budget cuts on the table could have disproportionate effects on the region.
Thousands of Valley residents rely on social service programs that face massive cuts, for instance. Also, counties rely on state money for the Williamson Act land-preservation program that also is on the chopping block.
"I am concerned that we don't have a representative at the table," Weber said. "I want to make sure that the unique circumstances of the Valley, which are doubly affected by the economy and the drought, are taken into consideration."
Most Valley lawmakers downplayed the situation, saying leaders will keep them abreast and take suggestions.
"Our input is valuable to them," said Assembly Member Connie Conway, R-Tulare. "It's my obligation to make sure that my conference committee members are hearing from me."
But Assembly Member Juan Arambula, D-Fresno, is concerned about a lack of input. He said he tried to get on the conference committee. But he suggested that leaders kept him off because he has pushed for significant spending cuts in private caucus meetings, while other Democrats want tax increases.
"Maybe I've been outspoken ... about the need to make more cuts," he said. "That's not an approach that sits well with some folks."
Arambula voted for tax increases in February but says voters in his district don't want any more hikes.
Legislative leaders said they focused on experience when assembling the conference committee, naming several members who have served on budget committees in each house.
Senate leader Darrell Steinberg, D-Sacramento, said there won't be deals favoring one region over another -- because lawmakers are looking at across-the-board cuts to help close a $24 billion shortfall.
"When you look at the magnitude and the seriousness of what we're dealing with in California, geography anywhere takes a back seat," he said.
To some degree, the Valley has a simple numbers problem.
Democrats make up a majority of the Legislature and control six of the conference committee spots. Of the San Joaquin Valley's 15 lawmakers, only six are Democrats. And Valley Democrats -- especially those near Fresno -- sometimes stray from the liberal positions taken by their colleagues from the Bay Area and Los Angeles.
The Valley Democrat with the highest rank is Sen. Dean Florez, D-Shafter, who was named Senate "majority leader" this year, the upper chamber's second in command.
Still, Florez said he's not directing the day-to-day decisions of the conference committee. Rather, he's working on "larger reforms," he said.
The Valley stands a greater shot of landing leadership slots on the Republican side. That's because the region is a GOP voting base, along with Orange County and the Inland Empire.
But in the Legislature, power moves between lawmakers in different regions not based on where they are from, but the stances they take.
For instance, in the Senate, Dennis Hollingsworth, R-Murrieta, unseated Dave Cogdill, R-Modesto because he took a hard line against new taxes and Cogdill did not.
Villines stepped down voluntarily but felt pressured, because he, too, struck a compromise with Democrats on taxes.
The Valley inevitably will rise again -- at least in GOP circles. Possible up-and-comers include the Assembly's Conway and Tom Berryhill, R-Modesto. Both voted against taxes in February.
Last week, new Assembly GOP leader Sam Blakeslee of San Luis Obispo named the two lawmakers as "Republican whips," who are charged with tracking legislation.
Stockton Record
S.J. farmers feel industry pain...Reed Fujii
http://www.recordnet.com/apps/pbcs.dll/article?AID=/20090607/A_BIZ/906070305
Milk is a big business in San Joaquin County.
Dairies produced enough of the fluid food to bring in an estimated $466 million in 2007, according to the latest figures from the county agricultural commissioner. But with extremely low prices this year, the cows are producing a flood of red ink for farmers here as well as in other parts of the country.
Dairy owners are burning up their equity - the value of their land, buildings, cows and other investments - to pledge it as collateral for bank loans to keep their farms afloat.
"There's billions of dollars in equity being lost from here to the East Coast. It's going to take years, years to recover," said Frank Faria, an Escalon dairy farmer.
He believes reports that as many as 25 percent of the nation's 80,000 dairy operators may quit or sell out to other operators before the crisis recedes.
"The pain is so deep," he said.
Walt Kessler, a Galt dairy farmer, worries about his future.
"It's a lot of sleepless nights," he said.
"You wonder what you're doing this for. ... You borrow money just to lose money; does that make sense?"
Scott Hudson, San Joaquin County's agricultural commissioner, said last week he hadn't heard of any area dairies closing yet, but he acknowledged that all are struggling.
Besides low prices and high costs for feed and other services and materials, the farmers face a whole new set of expenses due to increased environmental regulation.
Smaller dairies, in particular, have a hard time absorbing such costs.
"You may see some consolidation and that sort of thing," Hudson said.
And the crunch extends beyond the milking barns.
"Dairies are significant consumers of alfalfa crops, silage crops, corn crops - all for dairy feed," Hudson said. "When they're hurting and they're not able to buy, ... it impacts these other businesses also."
Hay was San Joaquin County's eighth most valuable farm commodity in 2007, worth nearly $97 million. According to the county crop report, silage was worth an additional $26 million that same year, and area farmers produced $56 million in grain corn.
Dairy operators welcome recent programs to help ease the crisis - such as dairy cooperatives paying to "retire" more than 100,000 cows and new U.S. Department of Agriculture export incentives - but said more needs to be done.
Faria welcomed proposals by dairy cooperatives to cut milk production. He also supports a Holstein Association USA plan to lock farmers into their historic milk volumes by assessing those who choose to increase production and redistribute the funds to other dairy owners.
"Until we can reduce the supply, we will continue to suffer," he said.
Kessler supports a U.S. Senate bill that would use milk production costs as a factor to set wholesale milk prices. In California, those prices are linked to market prices for common dairy commodities.
"It is the worst year that ever I have seen," said John Bartelink, the owner of Bartelink Dairy in Escalon since 1962.
Industry officials estimate the average California dairy, with nearly 1,000 milking cows, lost $300,000 in the first three months of the year, he said.
"I milk 700 cows," Bartelink said. "I didn't lose $300,000, but I lost."
At age 75, Bartelink said he keeps his hand in the dairy operation mainly to help his two sons, who do most of the heavy lifting.
"If I give up today, I know my boys are going to say, 'I'm going to quit it,' " he said.
San Francisco Chronicle
Group finishes river run to save salmon, water...Erin Allday
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/06/07/BAQT1829E2.DTL&type=printable
Several days into a 230-mile trek down the Tuolumne River, Owen Segerstrom was paddling through a quiet, picturesque canyon when he spotted a bald eagle flying overhead.
But he finished the day in a reservoir, where he had to be picked up in a van to drive over a dam and reach the water on the other side.
"It was really visually jarring," Segerstrom said. "Just upstream there's this bald eagle, and then it's a biological desert. You think about the fact that it's humans that did that."
Segerstrom, a 25-year-old Sonora resident, was part of a team of environmentalists who paddled the length of the Tuolumne River from the edge of Yosemite National Park to San Francisco Bay. They started three weeks ago and finished on Saturday at Aquatic Park, where Segerstrom clambered onto the sandy shore and talked with supporters about what he'd seen along the way.
The trip, organized by the Tuolumne River Trust, was intended to raise awareness of the tributary that supplies water to 2.4 million Bay Area residents. It was also meant to draw attention to the rapidly dwindling supply of salmon in the Tuolumne and other California rivers.
People might in theory know where their water comes from, said Eric Wesselman, executive director of the trust, but they don't always make the connection between fresh water pouring off the Sierra and the water coming out of their sinks.
"In a way we're bringing the river to San Francisco," said Wesselman, of the trip down the Tuolumne. "The more people know that water comes from a wild and scenic river in Yosemite, the more they'll use it efficiently. It's not just there for drinking water, but for fish and wildlife and recreation. It grows the food we eat."
Wesselman believes the river trip is the first time a group has paddled the length of the Tuolumne to the bay, and there are tentative plans to attempt it again next year. More than 200 people participated in the trip, although only two paddled the entire way, using kayaks, canoes and white-water rafts.
Segerstrom said technically they didn't manage to paddle the whole river - they had to take a fishing boat through one section in the delta, and they had to drive past one area where construction blocked the river in Modesto.
He said he was pleased that so many young people showed up to cheer him on at various spots along the river, or even paddle a few miles themselves. It's going to take that kind of personal interest in the river to convince people to change the way they use water, he said.
"I don't think it's the type of thing you can hammer people over the head with," Segerstrom said. "They have to touch the water themselves, dip their feet in it and interact with it."
Former subprime lenders stand to profit again...Carolyn Said
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/06/07/BUQN17VPUH.DTL&type=printable
Can folks who made millions peddling subprime loans use that same Midas touch to mint money from the housing market downturn?
Former top executives from Countrywide Financial, once the nation's largest mortgage firm and a poster child for loose lending standards, have launched a company to buy distressed mortgages from banks and the government at a discount, modify the loans so borrowers can afford them and pocket the profits from reselling them.
PennyMac Mortgage Investment Trust, located in Countrywide's hometown of Calabasas (Los Angeles County), filed papers late last month for a $750 million initial public offering on Wall Street. Its CEO and founder is Stanford Kurland, a 27-year veteran of Countrywide, who was the company's chief operating officer, president, and the No. 2 and heir-apparent to its CEO Angelo Mozilo. He left Countrywide in 2006, days after cashing out $130 million worth of its stock. In all, 11 of PennyMac's 14 officers hail from Countrywide. PennyMac declined an interview request because it is in the quiet period mandated by the Securities and Exchange Commission that precedes an initial public offering.
Countrywide, which agreed to sell itself to Bank of America in January 2008, was back in the news last week when Mozilo, along with the former chief financial officer and former chief operating officer, a successor of Kurland, were charged with civil fraud, which they all deny. None of the three is involved with PennyMac.
The fact that some architects of subprime lending now hope to profit from the crisis spawned by the practice doesn't sit well with many.
"It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it," Margot Saunders of the National Consumer Law Center in Washington told the New York Times.
Times columnist Gail Collins was more graphic.
"It's like Jeffrey Dahmer selling body parts to a clinic," she wrote.
Ironically, PennyMac's approach could benefit struggling homeowners, which has consumer advocates offering cautious compliments.
Most banks and investors who own mortgages still seem to find foreclosure preferable to so-called workout solutions; homeowners continue to report that their pleas for loan modifications fall on deaf ears. But PennyMac's business model is predicated on trying to keep people in their homes.
Since PennyMac plans to buy toxic loans at pennies on the dollar - and is buying whole mortgages, not ones sliced and diced into securities owned by multiple investors - it has the liberty to slash homeowners' monthly payments and even the principal they owe.
"PennyMac's general strategy is to keep borrowers in their homes by offering alternatives that include modification of the terms and conditions of their loans to reflect both the borrowers' current financial condition and the value of their homes," the company wrote in its Wall Street filing.
Loan modifications
That means it wants the apple-pie result of loan modifications to make mortgages affordable - something that banks haven't pulled off, despite months of prodding from Congress and two administrations.
PennyMac's "model suggests the great promise of an aggressive modification strategy; creating win-win opportunities for borrowers and investors," said Paul Leonard, director of the California office in Oakland for the Center for Responsible Lending.
Still, he added: "It's hard to overlook the fact that these are Countrywide veterans who no doubt contributed to some of the sophisticated schemes to sell bad loans to borrowers and make great profits, who are now finding profitable ways of fixing those loans."
Another part of PennyMac's pedigree that rankles many: PennyMac has big-bucks backing from BlackRock, the giant investment manager that's been tapped to help the government and banks dispose of toxic assets - such as the mortgages PennyMac hopes to buy on the cheap. Highfields Capital, a Boston hedge fund, is another major financial backer.
'Vulture investors'
PennyMac enters an increasingly crowded field of "vulture investors" seeking to capitalize on distressed mortgages, but its approach of trying to rework loans itself differentiates it.
Ryan Taylor, a principal at San Francisco's Cirios Real Estate, which provides data and valuations for distressed-asset funds (the more polite name for vulture investors), said he thinks PennyMac's near-term prospects are excellent.
"Their ability to make money is going to be pretty impressive," he said. "The key to making money in the distressed market is the servicing. The best way to do that is to start from scratch, and that's what they did; they have former loan officers dealing with distressed borrowers. Servicers who were in place during the real estate boom are more like the Titanic; it takes them forever to shift directions," so they have not been able to ramp up to do mass loan modifications.
Questionable ethics
"They capitalized on the way up, left at the right time, and now are going to capitalize on the way down," Taylor said. "From the business person's perspective, you have to say, that's pretty smart. From a moral, integrity, ethics perspective, it can be questionable."
PennyMac is structured as a real estate investment trust, which means it gets to duck federal taxes by distributing most of its profits to investors. It is a subsidiary of Kurland's Private National Mortgage Acceptance Corp. That firm, started a year ago, had raised $584 million as of March 31, and has spent $226 million of it, according to the Wall Street filing.
PennyMac's Wall Street filing provides a revealing peek into how mortgage insiders view the market.
"We believe that there are unique, current market opportunities to acquire distressed mortgage loans and mortgage-related assets at significant discounts to their unpaid principal balances," the company wrote. "We believe that more than $1 trillion of (residential mortgage) loans are troubled or at significant risk of default in their present state."
To date, the company's biggest deal was with the FDIC. It paid $43.2 million for the right to take over $560 million of distressed home loans from the failed First National Bank of Nevada. PennyMac will get to keep 20 cents of every dollar it can collect on those loans (a figure that eventually will hit 40 cents); the government gets the rest.
The company acknowledges that its Countrywide pedigree comes with baggage.
"There are several lawsuits pending against Countrywide and certain of its former officers," the prospectus says, adding that there was a possibility of civil charges against Mozilo, something that has now happened. "Certain of the officers of PennyMac who are former employees of Countrywide, including Stanford L. Kurland, our chairman and chief executive officer, who was chief operating officer of Countrywide until September 2006, have been named as defendants in lawsuits in which Countrywide and other employees and former employees of Countrywide are defendants. ... We cannot assure you that existing or future, if any, investigations or litigation will not generate publicity or media attention or adversely impact" the company's ability to conduct business.
Washington Post
Banks Put Off Plans to Sell Toxic Assets
Inflow of Capital Eases Sense of Urgency, But Action Called Key to Lending Revival...Binyamin Appelbaum...6-5-09
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/04/AR2009060404436_pf.html
The rush of capital into the banking industry over the past month is allowing firms to postpone the painful process of selling devalued mortgages and other troubled assets, a step many financial experts still consider necessary to fully revive lending.
The Federal Deposit Insurance Corp. said Wednesday that it would suspend indefinitely the launch of a program to finance investor purchases of banks' troubled loans because few companies were interested in selling. A related Treasury Department program to finance purchases of mortgage-related securities remains on the drawing board months after both were announced with fanfare.
The FDIC decision marked a victory for the banking industry, which has argued that such a program would transfer profit from banks to investors at public expense. It also showed the limits of the government's ability to impose its will on the banks. Regulators generally cannot compel firms to sell assets, and the inflow of private capital has undermined the argument that the banks must take urgent steps to get healthy.
But FDIC Chairman Sheila C. Bair said yesterday that the best course for banks, and for the broader economy, remained a combination of raising new capital and shedding old problems. She said that the FDIC would continue to prepare to help banks sell assets.
"It is preferable to get them to sell assets in combination with raising capital in order to get the banks to be in a better position to start lending again," Bair said in an interview. "Getting them off the books is a cleaner posture for the banks."
Fifty financial companies raised almost $50 billion from private investors in May, more than in the previous six months combined, according to analysts at investment bank Keefe, Bruyette and Woods.
The surprising success defied widespread predictions, including by senior government officials, that investors would be scared away by the unpredictable magnitude of eventual losses on troubled assets. It has also dramatically reduced the need for additional federal investments in the largest banks. The 10 companies identified by federal stress tests as needing deeper reserves against losses must submit plans to the government next week, but it is likely that only two, Citigroup and GMAC, will require additional government aid.
Some administration officials were concerned that launching the FDIC program could slow this momentum. Many loans are held at their original value because banks intended to keep the loans until repaid in full, but investors would only buy at much lower prices reflecting the increased risk of default. That would force banks to report large losses.
Some proponents of Bair's approach point out that there is a disconnect between the interests of individual banks and the health of the broader economy. They note that selling troubled assets, even at a loss, would clear room for new lending.
"You can't argue with the fact that each of these dollars that flows into the banking system is one less dollar the government has to come up with, but that doesn't mean the problem is over," said Daniel Alpert, managing director of Westwood Capital, who had expressed interest in buying loans through the FDIC program.
Banks, however, say that they are better equipped to sell troubled loans at the best possible prices.
Regions Financial, a major southeastern bank based in Alabama, created a special division last fall to sell troubled real estate loans. The company assigned three of its best salespeople to find buyers, and created a Web site where investors could view details about the loans. The division has sold 328 loans worth a total of $334 million, and executives say the prices are 15 to 20 percent higher than the company has realized by selling loans through third parties.
Tom Neely, the executive overseeing the program, said the company sells loans to investors interested in the underlying property, rather than those seeking a quick resale. He said he was concerned that the government program would attract the latter group, preventing banks from getting the best possible prices.
"The buyers that we want are going to use the property and so that brings a little bit of a better price," Neely said.
There are signs that investors are increasingly interested in buying troubled loans without government financing. DebtX, an online auction site for troubled loans, has approved several thousand new bidders this year. And a growing number of investors are creating funds to buy troubled assets. PennyMac Mortgage Investment Trust, started by former executives of Countrywide Financial, announced plans last week to raise up to $750 million from investors.
Jefferson Harralson, a financial analyst at Keefe, Bruyette and Woods, said the increased interest was obviating the need for the FDIC program.
"The government program wasn't to prop up asset values, it was to help finance buyers," he said. "And now that you're seeing deeper bidder pools, that are getting financing on their own, the financing is not as needed."
New York Times
Why Home Prices May Keep Falling...ROBERT J. SHILLER. Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.
http://www.nytimes.com/2009/06/07/business/economy/07view.html?_r=1&ref=business&pagewanted=print
HOME prices in the United States have been falling for nearly three years, and the decline may well continue for some time.
Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.
Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.
But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.
There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years.
Why does this happen? One could easily believe that people are a little slower to sell their homes than, say, their stocks. But years slower?
Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.
Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect.
Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.
In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.
This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable.
Imagine a young couple now renting an apartment. A few years ago, they were toying with the idea of buying a house, but seeing unemployment all around them and the turmoil in the housing market, they have changed their thinking: they have decided to remain renters. They may not revisit that decision for some years. It is settled in their minds for now.
On the other hand, an elderly couple who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again.
As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011.
All of these people could be made to change their plans if a sharp improvement in the economy got their attention. The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price.
For this reason, not all economists agree that home price declines are really predictable. Ray Fair, my colleague at Yale, for one, warns that any trend up or down may suddenly be reversed if there is an economic “regime change” — a shift big enough to make people change their thinking.
But market changes that big don’t occur every day. And when they do, there is a coordination problem: people won’t all change their views about homeownership at once. Some will focus on recent price declines, which may seem to belie any improvement in the economy, reinforcing negative attitudes about the housing market.
Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the
1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.