Economic Despair

Month after month, the numbers from the nation's housing market deteriorate.

CNNMoney.com -- Sales of new homes have plunged even more than expected to their lowest level in more than 12 years, leaving the market glutted with unsold homes and pointing to more trouble ahead for the battered housing market.

New home sales tumbled 9 percent in November to a seasonally adjusted annual rate of 647,000, according to a Census Bureau report Friday.

That was the worst showing since April 1995, when the pace of sales was 621,000, and is much worse than the 715,000 sales pace forecast by economists surveyed by Briefing.com.

“The severity of the subprime debacle may be only a prologue to the main act, a tragedy on the grand stage in the corporate credit markets,”

Ted Seides, the director of investments at Protégé Partners, a hedge fund of funds, wrote in Economics & Portfolio Strategy.

The credit crunch has hit banking sector payrolls. Let the downsizing begin.

(Reuters) - Merrill Lynch & Co (MER.N) plans to announce about 1,600 layoffs after disclosing fourth-quarter write-downs, CNBC reported on Thursday. The layoffs are likely to be in trading positions and related areas, and will not likely include the investment banking or private client groups, CNBC's Charlie Gasparino reported. Merrill Lynch had about 64,000 employees as of the end of September, so 1,600 layoffs would represent less than 3 percent of its work force

When the mess from the housing collapse finally clears, we will see that mortgage fraud was one of the main drivers behind rising prices. Easy credit made it easy to steal,

ATLANTA -- Skyrocketing foreclosures are a testament to how easy it was to borrow from mortgage lenders in recent years.

It may also have been easy to steal from them, to judge from a multimillion-dollar fraud scheme that federal prosecutors unraveled here in Atlanta. The criminals obtained $6.8 million in mortgages from Bear Stearns Cos., including a $1.8 million mortgage to Calvin Wright, a New Yorker who told the investment bank that he and his wife earned more than $50,000 a month as the top officers of a marketing firm. Mr. Wright submitted statements showing assets of $3 million, a federal indictment alleged.

In fact, Mr. Wright was a phone technician earning only $105,000 a year, with assets of only $35,000, and his wife was a homemaker. The palm-tree-lined mansion they purchased with Bear Stearns's $1.8 million recently sold out of foreclosure for just $1.1 million. Bear Stearns, meanwhile, posted the first quarterly loss in its 84-year history as it wrote down $1.9 billion of mortgage assets yesterday. (See related article.)

Fraud goes a long way toward explaining why mortgage defaults and foreclosures are rocking financial institutions, Wall Street and the economy. The Federal Bureau of Investigation says the share of its white-collar agents and analysts devoted to prosecuting mortgage fraud has risen to 28%, up from 7% in 2003. Suspicious Activity Reports, which many lenders are required to file with the Treasury Department's Financial Crimes Enforcement Network when they suspect fraud, shot up nearly 700% between 2000 and 2006.

In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training. The surge ranges from one-off cases of fudging and fibbing to organized criminal rings. The FBI says its active mortgage-fraud cases have increased to 1,210 this year from 436 in 2003. In some regions, fraud may account for half of all foreclosures. "We've created a culture where a great many people know how to take advantage of the system," says Mr. Prieston.

If 2007 was the year of subprime, 2008 will be the year of credit card defaults. The banks are loaded with unsecured debt, and the US consumer is overloaded. Defaults are rising, and things will get much worse, particularly if the economy slips into recession.

SAN FRANCISCO - Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come.

An Associated Press analysis of financial data from the country’s largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears.

Experts say these signs of the deterioration of finances of many households are partly a byproduct of the subprime mortgage crisis and could spell more trouble ahead for an already sputtering economy.

“Debt eventually leaks into other areas, whether it starts with the mortgage and goes to the credit card or vice versa,” said Cliff Tan, a visiting scholar at Stanford University and an expert on credit risk. “We’re starting to see leaks now.”

The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP. That represented more than 4 percent of the total outstanding principal balances owed to the trusts on credit cards that were issued by banks such as Bank of America and Capital One and for retailers like Home Depot and Wal-Mart.

At the same time, defaults — when lenders essentially give up hope of ever being repaid and write off the debt — rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission.

Serious delinquencies also are up sharply: Some of the nation’s biggest lenders — including Advanta, GE Money Bank and HSBC — reported increases of 50 percent or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago.

The AP analyzed data representing about 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors — similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45 percent of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.

Until recently, credit card default rates had been running close to record lows, providing one of the few profit growth areas for the nation’s banks, which continue to flood Americans’ mailboxes with billions of letters monthly offering easy sign-ups for new plastic.

Even after the recent spike in bad loans, the credit card business is still quite lucrative, thanks to interest rates that can run as high as 36 percent, plus late fees and other penalties.

But what is coming into sharper focus from the detailed monthly SEC filings from the trusts is a snapshot of the worrisome state of Americans’ ability to juggle growing and expensive credit card debt.

The trend carried into November. As of Friday, all of the trusts that filed reports for the month show increases in both delinquencies and defaults over November 2006, and many show sequential increases from October.

Discover accounts 30 days or more delinquent jumped 25,716 from November 2006 and had increased 6,000 between October and November this year. Many economists expect delinquencies and defaults to rise further after the holiday shopping season.

Mark Zandi, chief economist and co-founder of Moody’s Economy.com Inc., cited mounting mortgage problems that began after this summer’s subprime financial shock as one of the culprits, as well as a weakening job market in the Midwest, South and parts of the West, where real-estate markets have been particularly hard hit.

“Credit card quality will continue to erode throughout next year,” Zandi said.

Filing for bankruptcy is no longer a solution for many Americans because of a 2005 change to federal law that made it harder to walk away from debt. Those with above-average incomes are barred from declaring Chapter 7 — where debts can be wiped out entirely — except under special circumstances and must instead file a repayment plan under the more restrictive Chapter 13.


Credit standards tighten further, just one more reason why the housing market isn't about to recover any time soon:

(Washington Post) Call it the credit risk hangover after the housing boom binge. Home buyers and refinancers who cannot come up with sizable down payments and whose FICO credit scores are below 680 are about to get squeezed in the mortgage market.

Fannie Mae and Freddie Mac are imposing significant increases in fees for a range of borrowers with down payments of less than 30 percent who formerly were treated as "prime" credit applicants. At the same time, the two largest private mortgage insurers -- MGIC and PMI Group -- are raising premiums on consumers who have low down payments and scores in the mid- to upper 600s on the FICO scale developed by Fair Isaac Corp. The added costs for some home buyers could total thousands of dollars, either at settlement or in the form of higher interest rates.

Each company says it has experienced unexpectedly high losses on loans with these characteristics and must revise prices upward to handle the elevated risks. But some mortgage bankers and brokers say the higher costs and down payments will make homeownership impossible or very difficult for a large number of borrowers and will slow a housing market recovery.

Although Fannie Mae's and Freddie Mac's revised fees won't take effect until March 1, major lenders who sell loans to the two investors began imposing the surcharges on applicants this month. Some mortgage loan officers are upset that clients with FICO scores close to 700 -- far above the once-traditional 620 cutoff point between "prime" and "subprime" -- are being charged more.

"This is outrageous," said Steven Moore, a mortgage broker with 1st Solution Mortgage in Falls Church. "On a loan of $300,000 and with a credit score of 675 -- which is not a bad score -- and a 75 percent loan-to-value ratio (25 percent down payment), the cost is an additional $2,250 per loan." If the same borrower wants to do a cash-out refinancing to consolidate debt, the new Fannie-Freddie fee schedule will add another $1,500 to total costs on a $300,000 mortgage, Moore said. On a $400,000 loan, he estimates the extra fees would total $5,000.

From the Wall Street Journal.....

U.S. Mortgage Crisis Rivals S&L Meltdown

The home has long been the bedrock asset of most American families. Now, its value has become the biggest question mark hanging over the global economy and financial system.

Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to U.S. homeowners on two long-accepted beliefs and one newer one. The prevailing logic: The value of the American home would never fall nationwide, and people would almost always make their mortgage payments. The more recent twist: Packaging mortgage loans and turning them into securities would make the global economy more resilient if anything went wrong.

In a matter of months, though, much of the promise of the new financial architecture -- together with its underlying assumptions -- has proven to be a mirage. As house prices fall and homeowners default on mortgages at troubling rates, the pain has spread far and wide. An examination of the resulting crisis shows that it is comparable to some of the biggest financial disasters of the past half-century.

So far, the potential losses look manageable compared with the savings-and-loan crisis of the 1980s and the tech-stock crash of 2000-02. But the housing debacle could yet take years to work out, thanks to the sheer complexity of it. Until the mess is cleaned up, investors will remain jittery and banks will likely hold back on all kinds of lending -- a credit crunch that is already damping global growth and could tip the U.S. economy into recession.

The new financial system -- shifting risk from banks to securities markets -- has worked "pretty well" up until now, says former Federal Reserve Chairman Paul Volcker. "We're going to find out if it works well for a major-league crisis."

To ease the pain, the Federal Reserve has cut short-term interest rates twice and is expected to cut them further tomorrow. The Bush administration has also pressed for private-sector curative measures. First, it urged big banks to create a new entity to buy some mortgage-linked securities that don't have a ready market now. And a plan finalized last week calls for freezing interest payments on perhaps hundreds of thousands of qualifying homeowners whose mortgage notes are set to rise. (See a primer: Will the Rate Freeze Help You?) Both ideas are controversial. They are hailed by some as well-conceived financial first aid and criticized by others as inadequate -- or an impediment to crisis resolution.



.....at least back in July 2007. Wonder what he think now?

The New York Times has stopped speculating about whether further interest rate cuts are advisable. The only question worth considering is how much.

Inflation data comes out a few days later. The numbers could be very troublesome for the Fed. The headline CPI could be has high as 4 percent.

Accelerating inflation and the Fed is cutting rates; talk about policy incoherence.

Market Week
How Much of a Rate Cut?

PERSISTENT worries about the financial system have led many traders to stop questioning whether the Federal Reserve will cut interest rates again this week and to ask instead how big the cut will be. A Bloomberg News poll of economists forecasts a quarter of a percentage point. Prices of futures contracts tied to the benchmark federal funds rate show heavy betting on a half-point move.

Komal Sri-Kumar, chief global strategist at the TCW Group, a Los Angeles fund management firm, expects a quarter-point cut when Fed policy makers meet Tuesday. That would be best for the economy and stock prices, he says. “If there is no change, then the stock market tumbles,” he said. A half-point cut may prompt a relief rally in stocks, he said, although it may also ensure that “the dollar will take one more tumble.” That could force the Fed to start raising rates later to defend the long-enfeebled currency.

“The Fed will have to walk a narrow walk and cut rates by a quarter-point,” Mr. Sri-Kumar said. He expects the rate cut to be accompanied by a statement adding up to a quarter-point’s worth of soothing words. It is likely to indicate that officials understand that “growth is more of a concern than inflation,” he said.

He cautioned that stocks’ course will also depend on how well banks perform as they struggle to quantify their exposure to bad debt and clear it from their books. “The subprime situation needs to get settled,” Mr. Sri-Kumar said. “Until this is resolved, a cut in rates alone won’t help the financial sector.”

Even if the losses are more extensive than feared, he said, the mere act of accounting for them may help financial stocks and the broad market. “If you are able to draw a line under your losses and say this is it, the reaction will be positive,” he said, “even if the institutions have substantial losses.”

The answer is fairly obvious from this article in the Wall Street Journal.

Lookahead: Gimme Gimme Gimme

Like a spoiled child awaiting holiday gifts, the stock market is stamping its proverbial foot and saying: "I want a rate cut, or else." The combination of slowing jobs growth, somewhat weakened retail sales, and continued credit and housing market distress, has investors clamoring for more assistance from the Federal Reserve.

And -- after this week's rally and September's indulgent 50-basis point move -- the market may even turn its nose up at a 25-basis point cut Tuesday when Fed policy makers meet.

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