Tuesday July 29 Housing and Economic stories

Top Stories:

Pimco's Gross approves of blowing up 1 million houses - (business.smh.com.au) Banks face trillion dollar meltdown: Pimco. Falling US home prices will force financial firms to write down $US1 trillion ($1.04 trillion) from their balance sheets, crimping bank lending and sparking sales of assets, says Bill Gross, who manages the world's biggest bond fund. A total of $US5 trillion of mortgage loans, or almost half of the nation's home loans, belong to "risky asset categories'' such as subprime and Alt-A, Pimco's Mr Gross wrote in commentary posted on the firm's website yesterday. About 25 million US homes are at risk of negative equity, which could lead to more foreclosures and a further drop in prices, he said. A home has negative equity when it's worth less than the mortgage with which it was bought. The government could boost housing prices by buying 1 million new or unoccupied homes, "blow them up, and then start all over again,'' Mr Gross wrote, adding that the suggestion comes from "one of the wisest men I know.'' Aside from that solution, the housing legislation "is the best way to begin the long journey back to normalcy,'' he said.

McCain's son resigns from Silver State Bank board - (globaleconomicanalysis.blogspot.com) - Silver State Bancorp, the Henderson-based holding company for the similarly named bank, reported that Andrew McCain, son of Republican presidential candidate John McCain, resigned today from the boards of directors of the bank and bank holding company. The company cited “personal reasons” for McCain’s resignation, and a Silver State spokesman declined further comment. Gettin' While The Gettin' Is Good? I was not even going to report on this until I looked up Silver State Bank on bankrate.com. Silver State Safe & Sound? In a word, No. (rated a 5 per CAEL ratings, with 5 being least desirable, 1 most desirable). Notes on Safe & Sound® star ratings, CAEL rating. The most desirable Safe & Sound® CAEL rating is one, the least desirable is five, in accordance with industry standards. Bankrate.com has reversed this order in its graphic rankings for easy visual recognition. The top star rating is five, the lowest star rating is one. Performing institutions will generally receive a rating of 3 or better stars with the majority of banks falling into the 3-4 star range. By contrast, the performing Safe & Sound CAEL range would be 1, 2 and 3 with the majority of institutions falling into the 2 range.

"Run On Bank" by David N. Vaughn, FSU Editorial 07/28/2008 - (www.financialsense.com) “Think about it. If someone entered into a mortgage with payments they could not afford based on refinancing later on (thanks to rising prices) this means they were speculating. Additionally, rising prices would not make their mortgages affordable. It would imply greater debt and higher payments. The only thing you can do with a home you can’t make payments on is to sell it. It is not up to the taxpayer to fund a bail-out. It is up to the mortgage brokers and bankers who benefited from the bubble. Billions of dollars were pocketed by builders, bankers, and brokers. They should pay for this mess. This plan is simply an indirect transfer of money from taxpayers to Wall Street. It will provide minimal aid to homeowners. It is a bad idea but typical of modern America.”

"More trouble for IndyMac customers" by Anthony Cherniawski, FSU ... - (www.financialsense.com) Many IndyMac customers who are moving their money to another bank won't be able to access all of their funds for more than a week. By law, the other banks must make IndyMac cashier's check deposits up to $5,000 available for withdrawal in one business day. But any amount over that can be held up to nine business days. It is reported that some banks are not taking IndyMac checks at all.

'Extreme Makeover' house faces foreclosure - (www.macon.com) More than 1,800 people helped demolish the Harper family's decrepit home and replace it with a sparkling four-bedroom mini-mansion that towered over ranch and split-level homes in their Clayton County neighborhood. But three years later, the Harper's home has become the latest victim of the foreclosure crisis after the family used it as collateral for a $450,000 loan. The two-level home is set to go to auction on the steps of the Clayton County Courthouse Aug. 5. The couple did not return phone calls Monday, but they told WSB-TV they received the loan for a construction business that failed. The finished product was a four-bedroom house with decorative rock walls and a three-car garage. The home's door opened into a lobby that featured four fireplaces, a solarium, a music room and a plush new office. The couple, which ABC chose from some 15,000 applicants, spent the week on vacation in Disneyland while their home was being revamped. Materials and labor were donated for the home, which would have cost about $450,000 to build. Beazer Homes' employees and company partners also raised $250,000 in contributions for the family, including scholarships for the couple's three children and a home maintenance fund. Meanwhile, some of the volunteers who helped build the house are infuriated. Lake City Mayor Willie Oswalt was among a handful of volunteers who helped vault a massive beam into place in the Harper's living room. He's less than thrilled with the couple's financial decisions.

Higher Interest Rates Last Straw for Foolish Houseowners - (www.fool.com) Over the past two years, homeowners have had to deal with falling prices, a glut of inventory on the market, and tightening credit standards. This week, though, another threat to home prices has come into view, and it could spell disaster for a housing market struggling to find bottom. This week, interest rates on mortgages rose toward the highest levels in six years. According to Freddie Mac (NYSE: FRE), the average rate on a 30-year mortgage rose to 6.63%, up sharply from just 6.26% the week before. Similarly, rates on adjustable-rate mortgages (ARMs) rose from 5.10% to 5.49% -- all in just one week. Tough times, steep moves: Of course, this wasn't just any ordinary week for the home-loan industry. Mortgage market-makers Fannie Mae (NYSE: FNM) and Freddie Mac went to the brink of oblivion and back again, as fears of insolvency were at least temporarily squelched by promises of liquidity from the Federal Reserve and further relief from the federal government.

Fannie Mae bailout: Taxing America's poorest to help the richest - (blogs.law.harvard.edu) The federal government is soon to be ladling out tax dollars to bail out Fannie Mae. Who will pay for this? Joe Sixpack, a guy who works hard at two jobs, rents an apartment, and tries to support a couple of kids. Who benefits? Stockholders in Fannie Mae. Holders of bonds issued by Fannie Mae. The 5,000 employees of Fannie Mae, including the CEO who helped himself to $13.4 million in salary this year. What do the stockholders, bondholders, and employees have in common? They are all richer than average Americans and they are all going to be sucking down tax dollars paid by poorer than average Americans (plus some tax dollars from the rich, of course). Joe Sixpack might have been thinking that he could finally afford to rent a nicer apartment or maybe even buy a place. But now Congress is giving the states $4 billion to buy up property in crummy neighborhoods. Joe won’t be getting any bargains because he will have to compete with the government when he goes home-shopping. Suppose he remains a renter? Higher real estate prices will result in higher rents, which aren’t going to be too affordable for Joe because he is about to be laid off from one of his jobs. In Roman times the employees of Fannie Mae would be decimated, i.e., they would draw lots and 90 percent of them would beat the unlucky 10 percent to death with clubs. What would be a modern equivalent? At the very least taxpayers should have the satisfaction of seeing the highest paid 100 Fannie Mae employees fired with two weeks of severance pay (it can’t be that hard to find replacements given that the current staff’s primary achievements have been accounting fraud and then insolvency). The newspapers say that it is important for foreigners to have confidence that the U.S. will pay its debt. Let’s pay foreign bond holders in full then, using tax dollars as necessary. After all, a guy in China could not be expected to understand that a bunch of crummy houses in Cleveland were not worth $250,000 each. Let the domestic shareholders get 10 cents on the dollar and let the domestic bondholders get whatever the bonds are actually worth.

Macon Mall faces foreclosure - (globaleconomicanalysis.blogspot.com) Foreclosure action has begun against Macon Mall because of nonpayment on a $141.2 million loan, and a new management company has been approved by the court to take control of the 1.4 million-square-foot facility. Since the loan was made, Parisians and the Piccadilly Cafeteria have closed at the mall, and Linens-N-Things - part of the mall property, even though it's not inside the main building - is in the process of closing. In a letter filed in the case, "Dillard's has apparently communicated its intent to close its store location at Macon Mall." Based on an appraisal "the value of the property has fallen approximately 60 percent since June 30, 2005." The Shopping Center Economic Model Is History. More mall foreclosures are coming. 50-60% writeoffs will be common, and dozens of already stressed banks will fail as a result.

Hedge Funds May Post Worst Month in 5 Years as Bank Bets Sour - (www.bloomberg.com) Hedge funds may post their worst month in at least five years after bets on financial stocks and crude oil backfired. Hedge Fund Research Inc.'s Global Hedge Fund Index of more than 55 funds slid 3.2 percent through July 24, heading for the biggest monthly drop since the measure started in 2003. Wagers on a decline in financial stocks and homebuilders, one of the most popular, soured after Fannie Mae and Freddie Mac shares more than doubled in the six trading days to July 23. Bullish bets on crude oil turned to a loss as oil slid 15 percent from a record $145.29 a barrel on July 3 after doubling in a year. ``You have to believe that everyone had the same trade on,'' said Paul Meader, co-managing director of Corazon Capital Management, a Guernsey, Channel Islands-based manager with about $1.2 billion, mostly invested in hedge funds. ``There will be a lot of people hurting and licking their wounds with a tough July to report to their clients.''

Worried Banks Sharply Reduce Business Loans - (www.nytimes.com) Notice the tone of the story implies that people and businesses have the god-given right to cheap access to credit. Well sorry to say, but borrowing depends on finding people to lend money. Well, sorry, but the rest of the world (and US banks) and hunkering down. People and businesses will have to live within their means for once. Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring. Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001. The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

Funds for Highways Plummet - (online.wsj.com) An unprecedented cutback in driving is slashing the funds available to rebuild the nation's aging highway system and expand mass-transit options, underscoring the economic impact of high gasoline prices. The resulting financial strain is touching off a political battle over government priorities in a new era of expensive oil. A report to be released Monday by the Transportation Department shows that over the past seven months, Americans have reduced their driving by more than 40 billion miles. Because of high gasoline prices, they drove 3.7% fewer miles in May than they did a year earlier, the report says, more than double the 1.8% drop-off seen in April. The cutback furthers many U.S. policy goals, such as reducing oil consumption and curbing emissions. But, coupled with a rapid shift away from gas-guzzling vehicles, it also means consumers are paying less in federal fuel taxes, which go largely to help finance highway and mass-transit systems. As a result, many such projects may have to be pared down or eliminated.

Why millions just 11 days from financial ruin - (www.dailymail.co.uk) More than a third of adults could survive financially for only 11 days if they were to lose their job or be too ill to work, according to a survey.
The finding gives a worrying insight into the lives of millions who are living on a financial tightrope. Researchers looked at how much people spend every month and how much they have in savings. It found a massive gap between the two, which means most would be crippled by a sudden change in their circumstances.


Other Stories:

Housing Lenders Feel Heat - (online.wsj.com) Housing Bill Relies on Banks To Take Loan Losses. The housing rescue bill passed by the Senate Saturday hasn't been signed into law, but top Democrats already are putting pressure on regulators and bankers to make sure a major program to prevent foreclosures doesn't fall flat. For struggling U.S. homeowners, the success or failure of the program -- which would let roughly 400,000 owners refinance into affordable, government-backed loans -- depends largely on bankers' willingness to take a partial loss on the loans and to reduce the amount of money borrowers owe. Ken comment: You can bet these banks will be looking to dump/restructure their worst performing loans.

Chrysler Lending Arm In Weakened Position As It Refinances - (online.wsj.com) A critical deadline is approaching for Chrysler LLC, which must refinance $30 billion of its lending arm's working capital by Friday amid a shake-up in the unit's leasing strategy. The auto lending business, Chrysler Financial, has come under intense pressure in recent weeks, as resale values on leased cars fall and borrowing conditions tighten. Chrysler LLC on Friday decided to stop offering auto leases through Chrysler Financial beginning in August -- a move that could squeeze car dealers hoping to move Chrysler cars but could pacify the unit's restive lenders, who are worried about the value of Chrysler leases used ...

The repugnant bailout nation - (articles.moneycentral.msn.com)
'Stealth' Housing Bailout: It's Bigger Than You Think - (biz.yahoo.com)

What Does the Housing Bill Do? - (www.theconglomerate.org)
Bailouts are taxation without representation - (eyeonmiami.blogspot.com)
Why Housing Bill Won't Help Housing Market - (www.seekingalpha.com)
Government should get out of the business of assuming risk - (www.nytimes.com)
Why few decry Fannie-Freddie bailout's socialism - (money.cnn.com) For the second time this year, the government is considering the use of taxpayer money to rescue private companies. Sen. Jim Bunning warns of creeping socialism, but he seems to have found few allies. As financial skeptic James Grant recently mused, Why no outrage? There are plenty of theories, starting with the understanding that allowing the collapse of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) - the government-sponsored enterprises that are the subject of the latest Washington bailout effort - could crush economic growth by strangling an already wheezing housing market. With inflation on the rise and the economy losing jobs, no one wants to steepen the slide toward recession - even at the cost of hearing Bunning say over and over, "Since when are we France?"
But another factor in the widespread acceptance of the housing bailout is the memory of how well investors have done in the last 25 years. The hope is that unusual measures can clear the way for still greater prosperity ahead - even if the near-term outlook for the economy remains muddled.
Official Senator Contact List - (www.senate.gov)
House Votes on Bill To Betray Responsible Savers - (www.govtrack.us)
68% Price Reduction in Los Banos Benefits Responsible Family - (patrick.net)
Average S. Florida house dropped $4,100 a month for 2 years straight - (www.cbs4.com)
U.S. regulators seize two more banks - (news.yahoo.com)
Why wasn't IndyMac on FDIC problem list? - (www.sfgate.com)
My experience at IndyMac - (www.appraisersforum.com)
Visualize the Dow at 6,000 - (www.onlinejournal.com)

Dumpy $625,000 house proves bubble not over yet - (www.ocregister.com)


U.S. Deficit to Hit Record $490 Billion in 2009 - (www.bloomberg.com)
That '70s Woe in Rerun - (www.nypost.com)
Retailers may pass rising costs on to consumers - (www.dallasnews.com)
Higher prices heading beyond gas, food - (www.ap.com)

US credit crunch set to last for months - (www.ft.com) The credit squeeze in the US economy is likely to persist for many months and might even get worse, Gary Stern, president of the Federal Reserve Bank of Minneapolis, has told the Financial Times. He said that with interest rates at 2 per cent the Fed was well-placed to cope with any negative surprises on growth. By contrast, he said, it was not as well positioned to deal with any negative surprises on inflation.

SEC's Assault on Illegal Short Selling Intensifies - (online.wsj.com)

Top equity firm KKR says it's ready to go public now - (www.chron.com)
After Delay, KKR Finds a Way to Go Public - (www.nytimes.com)
US home owners cut back refinancing - (www.ft.com)
SEC Focuses on Illegal Short Selling - (online.wsj.com)

Advertising slowdown weighs on media groups - (www.ft.com)
Banks Rally, but Demons Still in Vault - (online.wsj.com)
Slowing US auto-finance market hits lenders - (www.ft.com)
Toyota lowers 2008 global sales target - (www.boston.com)
Chrysler looks to drop high-end models - (www.chicagotribune.com)
Brown-bag lunches stealing business from fast-food - (www.ocregister.com)

Darling looks at new mortgage plan - (www.ft.com)
India's Deficit Is a Danger - (online.wsj.com)
Moody's warns on European credit quality - (www.ft.com)
Asian Nixonomics May Spell Subsidy-Driven Stagflation - (www.bloomberg.com)
German Consumer Confidence Declines to Five-Year Low - (www.bloomberg.com)
Japan considers sovereign wealth fund - (www.economist.com)
ANZ Bank Profit to Fall as Much as 25% on Bad Debt Provision - (www.bloomberg.com)
House price values drop 10 months in a row - (www.telegraph.co.uk)
Moody's warns on European credit quality - (www.ft.com)
Credit Quality Worsens in Poland, Eastern Europe, Moody's Says - (www.bloomberg.com)
Growth in Money Supply,Credit Slows in Euro Zone - (online.wsj.com)
China's Cars, Accelerating A Global Demand for Fuel - (www.washingtonpost)
Fannie Mae and Freddie Mac: Congress backs rescue package - (www.telegraph.co.uk)
A Deposit-Protection Primer - (online.wsj.com)