Wednesday, February 18, 2009

US Economic Crisis: Obama Unveils Foreclosure Plan; Stock Market Continues Decline; Greenspan Says Nationalise Some Banks

Obama unveils foreclosure plan

By Andrew Ward in Washington
February 18 2009 18:16

Barack Obama on Wednesday vowed to restore faith in the “American Dream” with a plan to help up to 9m households avoid foreclosure as another round of grim data showed the housing downturn worsening.

Under the president’s proposals, the government would provide $75bn in subsidies to encourage lenders to reduce mortgage rates for 3m-4m borrowers at risk of losing their homes.

A further 4m-5m mortgages would be refinanced by Fannie Mae and Freddie Mac, the government-backed mortgage lenders, which stand to receive up to $200bn in fresh federal capital under the plan.

Mr Obama also pledged to push for reform of bankruptcy laws to allow judges to force lenders to reduce mortgage rates for bankrupt homeowners.

The measures marked the latest step in the administration’s evolving economic recovery plans and came a day after the president signed the $787bn fiscal stimulus into law.

“In the end, the home mortgage crisis, the financial crisis, and this broader economic crisis are interconnected,” he said. “We cannot successfully address any one of them without addressing them all.”

Data released on Wednesday showed that new residential building in the US plunged to a fresh record low in January, as falling house prices and rising rates of foreclosure deterred builders from breaking ground. Housing starts fell for the seventh month running, sliding by 16.8 per cent from December and 56.2 per cent over the past year.

Mr Obama said the housing crisis threatened to unravel “the American Dream itself” unless bold action was taken to arrest the downward spiral. “In the end, all of us are paying a price for this home mortgage crisis,” he said, “And all of us will pay an even steeper price if we allow this crisis to deepen.”

He made the remarks in Phoenix, Arizona - one of the cities worst hit by the downturn with house prices down 43 per cent since 2006 – at the end of a two-day visit to the US south-west. It was the latest in a series of campaign-style trips outside Washington to promote his economic plans in the face of stiff Republican opposition.

Under Wednesday’s proposals, the government would offer subsidies to lenders that agreed to reduce rates for struggling subprime borrowers. But lenders would be forced to follow strict government-imposed guidelines on how loans should be modified.

The administration would also make it easier for Fannie and Freddie to refinance mortgages at a lower rate by lifting rules that currently prevent them from refinancing borrowers who owe more than their home is worth.

Mr Obama said the Treasury department would use its existing authority to provide up to $200bn in capital to strengthen Fannie and Freddie and allow them to keep lending at affordable rates.

Dean Baker, co-director of the Center for Economic and Policy Research, said the proposals amounted to only a partial solution. “This bailout plan is likely to simply delay a day of reckoning for the banks at great cost to taxpayers and little obvious benefit to homeowners,” he said.

The president said aid would be targeted at “responsible” homeowners, warning that reckless speculators and unscrupulous lenders would not benefit. “Solving this crisis will require more than resources – it will require all of us to take responsibility,” he said. “All of us must learn to live within our means again.”

Copyright The Financial Times Limited 2009

Foreclosure plan factsheet

February 18 2009 17:27

Homeowner Affordability and Stability Plan

Executive Summary

The deep contraction in the economy and in the housing market has created devastating consequences for homeowners and communities throughout the country.

•Millions of responsible families who make their monthly payments and fulfill their obligations have seen their property values fall, and are now unable to refinance at lower mortgage rates.

•Millions of workers have lost their jobs or had their hours cut back, are now struggling to stay current on their mortgage payments – with nearly 6 million households facing possible foreclosure.

•Neighborhoods are struggling, as each foreclosed home reduces nearby property values by as much as 9 percent.

The Homeowner Affordability and Stability Plan is part of the President’s broad, comprehensive strategy to get the economy back on track. The plan will help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. In doing so, the plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too, as defaults and foreclosures contribute to falling home values, failing local businesses, and lost jobs. The key components of the Homeowner Affordability and Stability Plan are:

1. Affordability: Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices

•Enabling Up to 4 to 5 Million Responsible Homeowners to Refinance: Mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 80 percent of the value of their homes have a difficult time refinancing. Yet millions of responsible homeowners who put money down and made their mortgage payments on time have – through no fault of their own – seen the value of their homes drop low enough to make them unable to access these lower rates. As a result, the Obama Administration is announcing a new program that will help as many as 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.

•Reducing Monthly Payments: For many families, a low-cost refinancing could reduce mortgage payments by thousands of dollars per year:

•Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.

2.Stability: Create A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

•Helping Hard-Pressed Homeowners Stay in their Homes: This initiative is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. Millions of hard-working families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income – particularly those who received subprime and exotic loans with exploding terms and hidden fees. The Homeowner Stability Initiative helps those who commit to make reasonable monthly mortgage payments to stay in their homes – providing families with security and neighborhoods with stability.

•No Aid for Speculators: This initiative will go solely to helping homeowners who commit to make payments to stay in their home – it will not aid speculators or house flippers.

•Protecting Neighborhoods: This plan will also help to stabilize home prices for all homeowners in a neighborhood. When a home goes into foreclosure, the entire neighborhood is hurt. The average homeowner could see his or her home value stabilized against declines in price by as much as $6,000 relative to what it would otherwise be absent the Homeowner Stability Initiative.

•Providing Support for Responsible Homeowners: Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.

•Providing Loan Modifications to Bring Monthly Payments to Sustainable Levels: The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month to sustainable levels. Using money allocated under the Financial Stability Plan and the full strength of Fannie Mae and Freddie Mac, this program has several key components:

•A Shared Effort to Reduce Monthly Payments: For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400. That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.

•“Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years.

•Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

•Reaching Borrowers Early: To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.

•Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration -- together with the FDIC -- has developed an innovative partial guarantee initiative. The insurance fund – to be created by the Treasury Department at a size of up to $10 billion – will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.

•Institute Clear and Consistent Guidelines for Loan Modifications: Treasury will develop uniform guidance for loan modifications across the mortgage industry, working closely with the bank agencies and building on the FDIC’s pioneering work. The Guidelines will be used for the Administration’s new foreclosure prevention plan. Moreover, all financial institutions receiving Financial Stability Plan financial assistance going forward will be required to implement loan modification plans consistent with Treasury Guidance. Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee, and the Administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market. The agencies will seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by the federal government, including those owned or guaranteed by Ginnie Mae, the Federal Housing Administration, Treasury, the Federal Reserve, the FDIC, Veterans’ Affairs and the Department of Agriculture.

•Other Comprehensive Measures to Reduce Foreclosure and Strengthen Communities

•Require Strong Oversight, Reporting and Quarterly Meetings with Treasury, the FDIC, the Federal Reserve and HUD to Monitor Performance

•Allow Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options

•Provide $1.5 Billion in Relocation and Other Forms of Assistance to Renters Displaced by Foreclosure and $2 Billion in Neighborhood Stabilization Funds

•Improve the Flexibility of Hope for Homeowners and Other FHA Programs to Modify and Refinance At-Risk Borrowers

3.Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac:

•Ensuring Strength and Security of the Mortgage Market: Today, using funds already authorized in 2008 by Congress for this purpose, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability.

•Provide Forward-Looking Confidence: The increased funding will enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners, and provide forward-looking confidence in the mortgage market.

•Treasury is increasing its Preferred Stock Purchase Agreements to $200 billion each from their original level of $100 billion each.

•Promoting Stability and Liquidity: In addition, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.

•Increasing The Size of Mortgage Portfolios: To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.

•Support State Housing Finance Agencies: The Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving homebuyers.

•No EESA or Financial Stability Plan Money: The $200 billion in funding commitments are being made under the Housing and Economic Recovery Act and do not use any money from the Financial Stability Plan or Emergency Economic Stabilization Act/TARP.

Source: White House
Copyright The Financial Times Limited 2009

Mortgage plans fail to lift Wall Street

By Alistair Gray in New York
February 18 2009 17:51

US stocks swung between losses and gains in a volatile session early on Wednesday as investors weighed up much-anticipated plans from the Obama administration to help struggling homeowners.

Homebuilders missed out on the market’s modest recovery, down 1.9 per cent overall after the latest Commerce Department figures showed US housing starts and permits fell by more than expected in January to the lowest levels on record.

Utilities and telecoms came also came under pressure but bargain hunters tentatively dipped their toes back into some other sectors after a heavy sell-off in the previous session sent the market to its lowest level of the year.

Trading in financial stocks was particularly volatile. At one point the sector led the market’s declines with another sharp sell-off as the housing data underscored the scale of the economic crisis.

However, the sector was later one of the best performing, up 1 per cent overall.

Nick Kalivas, analyst at MF Global, said early in tthe session: “There is short covering in front of President Obama’s mortgage aid announcement. Most of the plan has been leaked, but the trade is on guard for a surprise.”

JPMorgan and Wells Fargo, the two biggest US banks by market capitalisation, were up 0.3 per cent to $21.66 and down 4.9 per cent to $13.02, respectively, following particularly heavy losses in the previous session.

Strength in the technology sector led the major indices into positive territory. By midday in New York, the S&P 500 was up 0.6 per cent at 793.51, the Dow Jones Industrial Average up 0.5 per cent at 7,589.16 and the Nasdaq Composite Index up 0.8 per cent at 1,482.66.

In the previous session, the S&P 500 slumped beneath the psychologically significant 800 level for the first time since November, which prompted concerns among technical analysts that the benchmark index would test an 11-year low.

The S&P, which began the year more than 20 per cent above that November nadir, stands less than 6 per cent away from the bear market low.

The Dow Jones Industrial Average, meanwhile, is within a hairsbreadth of its market low for the financial crisis.

Technology was the best performing sector, up 1.5 per cent overall and helped by news that Intelwould invest in three United Arab Emirates-based technology companies. Shares in the chipmaker rallied 3 per cent to $13.61.

Nvidia led the sector’s advance, up 5.2 per cent to $8.24 after the graphics chipmaker responded to a court filing from Intel.

Meanwhile in earnings news, Deere & Co lost 0.3 per cent to $33.40 after the world’s largest maker of farm equipment disclosed an unexpectedly sharp drop in quarterly profit and cut its full-year forecast.

Goodyear Tire & Rubber, the latest automotive supplier to post losses related to the stricken US car industry, added 0.3 per cent to $2.06 in choppy trading despite a worse-than-expected loss. The group plans to cut 5,000 jobs.

The telecoms sector took scant comfort from Comcast’s better-than-expected results. Although the cable company raised its dividend 8 per cent, Comcast said capital expenditure would decline and that it was unlikely to complete a share buyback by the end of the year.

The shares fell 3.6 per cent to $12.43 while the telecoms sector lost 0.3 per cent overall.

US-listed shares in Rogers Communications dropped 7.7 per cent to $25.08 after the Canadian telecoms group disclosed worse-than-expected fourth-quarter earnings.

On the upside, Sprint Nextel allied 4.4 per cent to $2.64 after David Dixon, analyst at Friedman, Billings, Ramsey, raised his recommendation on the stock from “market perform” to “outperform”, citing cost-cutting plans.

Elsewhere, Nalco rallied 5.6 per cent to $11.68 after it became the latest stock to be added to Warren Buffett’s portfolio. Berkshire Hathaway became the second- largest holder in the water treatment company with a 6.4 per cent stake.

General Motors fell 5.5 per cent to $2.06 following sharp losses in the previous session. The carmaker, along with rival Chrysler, requested up to $21.6bn more in federal funds to implement restructuring plans.

Copyright The Financial Times Limited 2009

Greenspan backs bank nationalisation

By Krishna Guha and Edward Luce in Washington
February 18 2009 00:06

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.

“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

Mr Greenspan’s comments came as President Barack Obama signed into law the $787bn fiscal stimulus in Denver, Colorado. Mr Obama will announce on Wednesday a $50bn programme for home foreclosure relief in Phoenix, Arizona. Meanwhile, the White House was working last night on the latest phase of the bailout for two of the big three US carmakers.

In his speech after signing the stimulus, which he called the “most sweeping recovery package in our history”, Mr Obama set out a vertiginous timetable of federal decisions in the coming weeks that included fixing the US banking system, submission next week of the 2009 budget and a bipartisan White House meeting to address longer-term fiscal discipline.

“We need to end a culture where we ignore problems until they become full-blown crises,” said Mr Obama. “Today does not mark the end of our economic troubles… but it does mark the beginning of the end.”

Copyright The Financial Times Limited 2009

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