KeNo's Housing and Economic Portal: Wednesday October 28 Housing and Economic stories

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TOP STORIES:

Small U.S. firms face credit squeeze as crisis drags - (www.reuters.com) Small companies create more than half of America's jobs, but the entrepreneurs who drive this part of the economy continue to complain that access to credit two years into the recession remains scarce. Small business owners say banks remain extremely wary of risk and a world away from the carefree lending that inflated an epic boom in housing values that went bust and pushed America into its worst economic downturn in decades. They say their home equity lines of credit have been cut, business credit lines withdrawn and credit card limits slashed. Still profitable firms complain of a major pullback by banks, which many warn will leave a U.S. economic recovery stillborn. "It's like we've gone back 15 years in time," said Carmine Ryan, who founded Ryan Bros Coffee in San Diego with his brothers Tom and Harry in the early 1990s, using credit cards. "We have a proven track record, we pay our bills early and we're profitable," he said. "But banks are so gun-shy now that no one would touch us. They're just sitting on the money." The Ryans developed a wholesale coffee business and opened a second coffee shop earlier this year. After they opened it, they sought a loan of $120,000 to finance operations. Nonprofit lender CDC Small Business Finance was able to arrange a $90,000 loan. The rest they had to come up with themselves. "This is not the way it should be right now," Harry Ryan said. "Banks should be lending to people like us." A few miles away, Yi Ping Lai runs an online business, Heart to Heart Gifts, which sells toys and decorations ranging in price from $6 to $100 for girls up to six years of age. Last year, her sales passed $1 million. With the downturn, her revenue will end up about 50 percent lower this year. But she will still turn a profit, she says. In August, she got a letter from her bank canceling her $55,000 business line of credit. She said the bank cited routine credit checks that had reduced her credit score. "All of those credit checks were for legitimate personal reasons," Yi said. "For instance, I move apartment and my landlord ran a credit check on me. I tried to explain that to the bank. But they said I was now a risky option for them." The bank later restored $20,000 in credit. But Yi said she is being hampered in developing a new product line. "I need that cash flow for my business," she said. Susan Lamping, a senior community loan officer at the nonprofit CDC in San Diego, helped Yi obtain $35,000 in credit.

Latvia Will Seek Agreement to Appease Bailout Donors - (www.bloomberg.com) Latvia is considering budget cuts involving reducing spending and raising taxes in a last-minute effort to satisfy its international loan donors, Finance Minister Einars Repse said after today’s Cabinet meeting. The government is planning on increasing revenue by 180 million lati ($375 million) and cutting expenditure by 320 million lati, Repse told reporters in Riga. Details won’t be made public until a final agreement has been reached within the Cabinet and with the lenders, probably within a week, he said. The measures represent “a fiscal consolidation that will satisfy” the International Monetary Fund, the European Union and Sweden, who had insisted on 500 million lati in budget cuts, said Prime Minister Valdis Dombrovskis. The IMF, the EU and Sweden agreed to give Latvia a 7.5 billion-euro ($11 billion) loan in December and urged the government to adopt tougher austerity measures. Swedish PrimeMinister Fredrik Reinfeldt, who holds the EU presidency, on Oct. 5 said Latvia “must correct” its deficit while Riksbank Governor Stefan Ingves has said the country risks being “left in the cold.” European Union Monetary Affairs Commissioner Joaquin Almunia will visit Riga tomorrow. ‘Sneak In’: “They’re in the clear for the time being, but similar temporary disagreements will likely recur,” said Richard Segal, a fixed-income desk strategist at Knight Libertas U.K. “There is a history of Latvian politicians becoming complacent and trying to sneak in lower budget cuts, which the EU and IMF notice at the last minute. I wouldn’t rule this out in future.” International admonitions grew more strident in tone after Latvia said it could achieve a targeted 8.5 percent deficit of gross domestic product in 2010 by cutting 325 million lati off the budget, 175 million lati less than the IMF, the EU and Sweden had demanded. Latvian coalition parties are ready to discuss a tax on real estate, which Parliament voted against sending to committee stage on Sept. 17, the Diena newspaper reported today. All coalition parties agreed to introduce the tax when they signed agreements with the EU and IMF.

Foreclosures Grow in Housing Market's Top Tiers - (online.wsj.com) New data suggest that foreclosures are rising in more expensive housing markets. About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com. The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006. The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. "The slope of that curve in recent months is much sharper than it was recently," said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up. The Zillow research compared homes against the median values for their local market and broke each market into three tiers by value. Zillow then looked at the share of monthly foreclosures in each tier over the past decade. Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year. The prime category includes so-called exotic mortgages that were increasingly used to buy more expensive homes, including interest-only mortgages that allowed borrowers to defer principal payments during an initial period. Borrowers often aren't able to refinance out of these products because the drop in home values has left them with little equity in their homes.

California Debt Unnerves Investors as Taxes Plunge $2 Billion - (www.bloomberg.com) A $2.1 billion drop in California tax collection is opening a hole in Governor Arnold Schwarzenegger’s budget only three months after lawmakers in the most-populous state slashed spending for the second time in a year. General fund revenue in the state accounting for 13 percent of the U.S. gross domestic product dropped to $19.4 billion during the fiscal year’s first three months, according to figures Democratic Controller John Chiang released Oct. 9. The total for the period ended Sept. 30 trailed by $1.1 billion, or 5.3 percent, forecasts in the annual budget the Republican governor signed July 28. “This reinforces that state’s budget problems aren’t over, and as the year goes on, we’re likely to see growing budget deficit projections,” said David Blair, an analyst with Pacific Investment Management Co. in Newport Beach, California, which invests $20 billion in municipal bonds. “This clearly is going to continue to put pressure on the Legislature and the governor.” The latest report underscores how states including California, the largest municipal bond issuer in the U.S., are still dealing with fallout from the recession even as the economy begins its recovery. The state last week was forced to raise yields to attract buyers to a $4.1 billion debt sale, after cutting the issue from $4.5 billion. California’s decision helped push up borrowing costs in the municipal market by the most in almost four months even as states prepare new issues of taxable Build America Bonds, whose sales already total $40.2 billion. The Treasury pays 35 percent of interest costs for the debt, part of the federal economic stimulus plan approved in February. Losing Jobs: State governments are particularly hard hit by a continuing loss of jobs, which dampens the income- and sales-tax collections upon which they depend. From April through June, states and localities recorded a 12 percent tax revenue decline from a year earlier, the third consecutive quarterly drop, according to the U.S. Census. The national unemployment rate in September was 9.8 percent, the highest since 1983, according to the U.S. Labor Department.

Government Gears Up for Second Stimulus - (apnews.mynews.com) Confronted with big job losses and no sign the U.S. economy is ready to stand on its own, Democrats are working on a growing list of relief efforts, leaving for later how to pay for them, or whether even to bother. Proposals include extending and perhaps expanding a popular tax credit for first-time home buyers, and creating a new credit for companies that add jobs. Taken together, the proposals look a lot like another economic stimulus package, though congressional leaders don't want to call it that. Democratic leaders in Congress and the White House say they have no appetite for another big spending package that adds to the federal budget deficit, which hit a record $1.4 trillion for the budget year that ended last week. But with unemployment reaching nearly 10 percent, many lawmakers are feeling pressure to act. Some of the proposals come from the Republicans' playbook and focus on tax cuts, even though they, too, would swell the deficit. "We have to do something for the unemployed, politically and economically," said Rep. Charles Rangel, D-N.Y., chairman of the tax-writing Ways and Means Committee. The House already has voted to extend unemployment benefits an additional 13 weeks for laid off workers in the 27 states where the jobless rate is 8.5 percent or above. Senate Democrats reached a deal Thursday to extend the benefits an additional 14 weeks in every state. Both proposals are paid for by extending a federal unemployment tax. Also on the table: extending subsidies for laid-off workers to help them keep the health insurance their former employers provided, known as COBRA. The current program, which covers workers laid off through the end of the year, costs nearly $25 billion. Congressional leaders haven't settled on the length of an extension, or how to pay for it. Several bills would issue extra payments to the more than 50 million Social Security recipients, to make up for the lack of a cost-of-living increase next year. One bill would set the one-time payments at $250, matching the amount paid to Social Security recipients and railroad retirees as part of the stimulus package enacted in February. The payments would cost about $14 billion and would be paid for by applying the Social Security payroll tax to incomes between $250,000 and $359,000 in 2010. Currently, payroll taxes apply only to the first $106,800 of a worker's income.

34 Banks Not Paying Their Quarterly TARP Dividends - (www.usatoday.com) The U.S. taxpayers' investments in smaller banks are increasingly at risk. In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury's judgment in approving these banks as "healthy," a necessary step for them to get TARP funding. "The banks are not paying their dividends because they are worried about preserving capital," says Eric Fitzwater, associate director of research at SNL Financial. The Treasury Department says it cannot force an institution to pay dividends. "For some banks, it may be prudent to exercise their right not to pay dividends in a particular month, and we respect their right to do so," says Meg Reilly, a Treasury spokeswoman. "To draw any broader conclusions about the state of the banking sector from one month is highly premature and speculative." However, a lot of smaller banks are already under stress. Weighed down by foreclosures and delinquencies, 98 banks have failed so far this year, vs. 25 for all of last year. Besides insurer American International Group and lender CIT Group, most of the other non-payers are smaller institutions that received $400 million or less in TARP funds. Top Republican on the House Financial Services Committee, Rep. Spencer Bachus, R-Ala., says: "We must ensure taxpayers are repaid." Some say Treasury might have been too hasty in approving some banks for TARP funds. "Perhaps the Treasury made assumptions that were a little bit too rosy," says Walter Todd, who invests in banks at Greenwood Capital. "My question is also whether the Treasury is staffed adequately to handle this tremendous undertaking." Treasury has given $365 billion to 700 institutions from TARP. AIG, to which the government has pledged $180 billion, has accumulated $1.6 billion in unpaid dividends. And CIT, which received $2.3 billion from TARP, said in a regulatory filing that it is restructuring its debt and seeking approval from bondholders for a pre-packaged bankruptcy. If that happened, it would wipe out the entire government investment.

OTHER STORIES:

Dylan Ratigan on Corporate Communism – (www.dailypaul.com)
US Forces Abandon Isolated Afghan Base After Ambush - (apnews.mynews.com)
Who's Behind the Sneak Attack on the Dollar? - (www.politico.com)
FHA May Need a Bailout - (www.nytimes.com)
Elizabeth Warren: Wall Street's Worst Nightmare - (www.motherjones.com)