Friday, December 05, 2008

US Economic Crisis Bulletin: Bush Acknowledges Recession; Mortgage Problems Worsens

Bush acknowledges recession, automakers' troubles

AP White House Correspondent

WASHINGTON – President George W. Bush publicly acknowledged for the first time Friday that the U.S. economy is in a recession and worried aloud that Detroit's Big Three automakers may not all survive their mounting troubles.

Four days after the long-suspected existence of a recession was made official, Bush used the word himself.

"Our economy is in a recession," Bush said flatly, speaking to reporters on the South Lawn only hours after the release of a government report showing the biggest month of job losses in 34 years. "This is in large part because of severe problems in our housing, credit and financial markets, which have resulted in significant job losses."

While repeatedly listing the serious problems in the economy, the White House has refused to embrace the actual term until Monday, when a panel for the National Bureau of Economic Research said the recession began last December and is ongoing.

With automakers, particularly General Motors, in fear of bankruptcy, they are seeking from Washington a huge cash infusion of up to $34 billion, beyond an existing $25 billion loan program. Lawmakers are considering the idea, but there is uncertainty about the level of support on Capitol Hill for that plan.

Bush displayed skepticism about the wisdom of new aid to companies that still need to make "hard choices on all aspects of their business." So while urging lawmakers to act next week to help the battered industry, Bush urged a Congress controlled by opposition Democrats to follow his approach.

The president supports adjusting the $25 billion loan program, so that the money would be available more quickly and for more urgent needs than its original long-term purpose of helping to retool factories to produce more energy-efficient cars.

"I am concerned about the viability of the automobile companies," he told reporters on the South Lawn. "I am concerned about those who work for the automobile companies and their families. And likewise, I am concerned about taxpayer money being provided to these companies that may not survive."

With only 46 days left in office before President-elect Barack Obama takes over, Bush declared: "It's important to make sure that taxpayers' money be paid back if any is given to the companies."

The president spoke not long after the release of a government report showing the biggest month of job losses in 34 years. Reacting to the jobs report for November, which also showed a huge jump in the unemployment rate to 6.7 percent, Bush expressed deep concern for Americans who have lost jobs, but also said there are some encouraging signs about the credit markets. "There is still more work to do," he said. "My administration is committed to ensuring that our economy succeeds."

At 12 months, the current recession is already the longest since a severe 16-month slump in 1981-82. Many economists say this downturn will ultimately set a new record for the post-World War II period.

During Bush's eight years in office, the United States has fallen into two recessions. The first one started in March 2001 and ended in November of that year.

Home loan troubles break records again

AP Real Estate Writer

WASHINGTON – A record one in 10 American homeowners with a mortgage were either at least a month behind on their payments or in foreclosure at the end of September as the source of housing market pressure shifted from risky loans to the crumbling U.S. economy.

The percentage of loans at least a month overdue or in foreclosure was up from 9.2 percent in the April-June quarter, and up from 7.3 percent a year earlier, the Mortgage Bankers Association said Friday.

The foreclosure crisis continued to be concentrated in states like Florida, where a stunning 7.3 percent of all loans were in foreclosure at the end of September, by far the highest in the country.

In Nevada, the number was 5.6 percent. It was 3.9 percent in California — compared with about 3 percent nationally.

Distress in the home loan market started about two years ago as increasing numbers of adjustable-rate loans reset to higher interest rates. But the latest wave of delinquencies is coming from the surge in unemployment.

Employers slashed 533,000 jobs in November, the most in 34 years, catapulting the unemployment rate to 6.7 percent, the Labor Department said Friday. "Now it's a case of job losses hitting more across the board," Jay Brinkmann, the trade group's chief economist.

With the economy worsening, the much-anticipated bottom of the housing market likely will be pushed further into the future.

"Things are going to get worse before they get better," said Northern Virginia housing economist Thomas Lawler.

Most troubling, he said, is that the mortgage bankers' report reflects conditions before October's stock market plunge and the resulting economic fallout.

"The number of homes that are in the foreclosure process is so high — right before the economy has fallen off a cliff," Lawler said.

The U.S. tipped into recession last December, a panel of experts declared earlier this week, and economists fear it could be the longest and most severe in decades. Since the start of the recession, the economy has lost 1.9 million jobs.

Job losses are already having an impact in rising delinquency rates for traditional 30-year fixed rate loans made to borrowers with strong credit. Total delinquencies on those loans rose to 3.35 percent in September from 3.07 percent at the end of June, the Mortgage Bankers Association said.

Lenders appear to be on track to initiate 2.25 million foreclosures this year, up from an average annual pace of less than 1 million during the pre-crisis period, Federal Reserve Chairman Ben Bernanke said this week. In the third quarter, there were about 575,000 new foreclosures, with about 183,000 in California and Florida combined, according to the MBA's data.

There were some modest signs of stabilization. The number of loans that entered the foreclosure process totaled 1.07 percent of all loans in the third quarter, flat from the second quarter.

That number, however, likely reflects changes in state laws that delay or extend the foreclosure process and efforts to work out or modify loans that could still fall back into foreclosure.

Also, the total delinquency rate on subprime adjustable-rate loans remained just over 21 percent, down from a peak of 22 percent in the first quarter.

With delinquencies still accelerating on many types of loans, efforts to stabilize the U.S. housing market are accelerating. The Treasury Department is now considering a plan to make loans at 4.5 percent as a way to revive the U.S. housing market. The plan being considered would apply to new home purchases, not refinanced loans.

But some analysts worry that the government's plan will delay a necessary deflation of the housing bubble. With the government effectively lowering mortgage rates, housing prices could be prevented from falling to a more affordable level.

Any government assistance plan should exclude homes that are out of line with rents or other measurements of affordability, said Dean Baker, an economist and co-director of the Center for Economic Policy Research in Washington.

"It's absolutely counterproductive," he said, "to try and prop up prices."

Uncertain impact of US push to cut mortgage rates

While Treasury mulls help to the best borrowers, Bernanke urges aid to those facing foreclosure.

By Dan Murphy | Correspondent of The Christian Science Monitor
from the December 5, 2008 edition

Another week, another proposal to shore up plummeting US home values. This time, the US Treasury Department is considering a plan to dramatically push down mortgage rates, which it hopes will stimulate demand for new homes.

But the still embryonic plan is focused on the most creditworthy home buyers and offers little direct assistance to people struggling with debt and foreclosures on existing homes. Coming a month before President-elect Obama's inauguration and amid criticism by Democrats in Congress that emergency steps taken so far have neglected the Americans who need help most, it's likely to change in the new year.

As it stands now, according to bankers and analysts, the plan revolves around a massive new issue of government debt that would be used to buy mortgage-backed securities from Fannie Mae and Freddie Mac, the troubled mortgage-finance companies the government took control of in a September bailout worth up to $200 billion. The two firms would make this new cash available to home lenders – but on the condition they issue mortgages at 4.5 percent, down from a current average of about 5.5 percent.

That difference amounts to $300 a month on a $500,000 mortgage, making it easier to buy homes and, in theory, buoy prices by creating more demand. But a key assumption behind the proposal is that housing prices are falling because of the current financial crisis. But some analysts say it's the other way around: the current financial crisis represents a housing bubble that's been popped.

If that's true, then the prospects of government action halting the slide in home prices look dim.

"I don't share the view that houses are undervalued now and it's only the credit crisis that's keeping property prices low," says Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.

"Housing prices went up 20 percent a year in some markets for five years. These houses simply aren't worth what they were. We're not going to be able to bribe people to buy homes for more than they're worth with cheaper rates."

Mr. Cecala isn't entirely opposed to the Treasury's idea, as it would pump more money into the economy and do some good on that basis. But he and others point out that current mortgage rates are already at historically low levels and haven't helped home prices yet – in large part because too many homes were built during the construction boom of recent years. "Demand has to meet supply," he adds.

Home prices probably need to fall further before the market stabilizes, says Jack McCabe, CEO of McCabe Research, a consultant to the housing and finance industries. "If banks aren't willing to lend because housing prices are in a free fall, it doesn't matter if rates go down to 2 percent," he says. "The problem is finding a bottom for this housing market and keeping people in their homes. Trying to simply prop up prices probably won't work."

Mr. McCabe, one of the analysts who predicted the housing collapse, points out that, historically, average US home prices have been about three to four times median household incomes. But during the recent boom, particularly in high-growth areas like Arizona and Florida, prices rose in many cases to eight times households' income. "If you're looking for a bottom, that's where you'll find it."

He says the current proposal is reflective of the overall approach of the Bush administration, which he expects will contrast sharply with Mr. Obama's. "The difference is they're trying to work from the top down instead of the bottom up. They've been leaving it up to the bankers who created the mess to fix it. But how do you fix if you didn't understand the problem to begin with?"

McCabe says a more profitable approach would be to focus on keeping existing homeowners out of foreclosure, using government programs to help borrowers reduce the principal and/or interest rate on their existing loans and perhaps guarantee new mortgages.

"If money was injected specifically into the banking system to write down principal on mortgages that would have a lot more impact than bringing down already low interest rates," he says.

Indeed, the effort to help the least creditworthy borrowers got a big push from Fed Chairman Ben Bernanke Thursday.

"The foreclosure rate remains too high … more needs to be done," he said at a news conference. He specifically mentioned greater efforts to reduce the principal owed on existing homes, something the government has been reluctant to support so far, fearing it will encourage people who might be able to make payments to default – since that might make them eligible for a better deal.

Action is needed, he said, because foreclosures are on track to reach 2.25 million this year, more than double the average annual level.

He outlined a number of what he called "promising options" to reduce preventable foreclosures.

One option would ease the terms of a loan-modification plan put forward by the Federal Deposit Insurance Corp. that seeks to make monthly mortgage payments more affordable. The FDIC put this plan into effect at IndyMac Bank, a large savings and loan that failed earlier this year, and has used it to modify mortgages at other financial institutions.

Under the so-called IndyMac plan, struggling home borrowers pay interest rates of about 3 percent for five years. Rates are reduced so that borrowers aren't paying more than 38 percent of their pretax income on housing. Mr. Bernanke suggested this threshold could be lowered to perhaps 31 percent of income, with the government sharing some of the cost.

Yet another option would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the "Hope for Homeowners" or another government program that insures home mortgages.

Material from the Associated Press was used in this report.

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