Tuesday September 9 Housing and Economic stories

Top Stories:

Fed to Banks: Stop Pretending Fannie Stock Is Worth Anything - (www.federalreserve.gov) All institutions are reminded that investments in preferred stock and common stock with readily determinable fair value should be reported as available-for-sale equity security holdings, and that any net unrealized losses on these securities are deducted from regulatory capital.

County assessor takes heat for downgrades - (www.contracostatimes.com) Contra Costa cities hardest hit by the foreclosure crisis say the county assessor has made their fiscal situations worse with wholesale downgrades of property values. While nobody doubts assessments should drop in the flailing nationwide housing market, some are upset that Kramer cuts valuations with such vigor. Kramer has reassessed hundreds of entire subdivisions this year. Thirty percent of the county's 274,000 single-family homes have had their value reduced. He has reviewed more than 150,000 homes, checking back to 1998 sales, many years earlier than most assessors in the state. Such drastic cuts, which are in line with other counties, burden governments trying to balance budgets strained by the sagging economy. Contra Costa, which receives 85 percent of its locally generated general purpose revenue through property taxes, has had to trim its budget by about $52 million, and faces at least another $17 million in cuts. The county is not alone — assessed growth dropped in almost every Contra Costa city. "You wouldn't believe some of the conversations I've had and with who I've had them," said Kramer last week, sitting at his desk overlooking Highway 4 in Martinez. "They've been ugly, very ugly." Kramer met with Antioch, Brentwood and Oakley city leaders in early July. They said that they were blindsided by lower than anticipated property tax revenue.

Bye Bye Banks: Freddie and Fannie Preferred Holders to Take Big Hits? - (www.nakedcapitalism.com) Lots of small and mid-sized banks in the U.S. have, with encouragement from regulators, built up big holdings in Fannie and Freddie preferred stock, which they use to satisfy their capital requirements. If Fannie and Freddie preferred shares become worthless, a lot of banks will become insolvent. Which, with the FDIC insurance fund already being depleted by bank failure, could end up costing taxpayers a ton. The stunner, which contradicts preliminary reports, is that the preferred shareholders in the GSEs will take losses. The Wall Street Journal reports that dividends on common will be eliminated and those on preferred will be suspended (Bloomberg, Reuters, and the New York Times were less specific, but indicated that preferred shareholders would suffer).

Failed bank had McCain's son on board The Australian - (www.theaustralian.news.com.au) This is not new news, but here is some more information to de-bunk the spin (by the Republicans) that McCain was only on the audit board for 5 months. However, Mr McCain's ties to Silver State date to 2006, when he became a director of Choice Bank, a small Scottsdale, Arizona lender that Silver State acquired that year. Mr McCain's family was an early investor in Choice, according to people familiar with the matter. Choice was smaller than Silver State, but its finances deteriorated just as quickly and hurt the parent company. As of March 31, 2008, Choice was facing $US7.9 million worth of delinquent loans, up from $US1.6 million three months earlier. Silver State recently logged an $US18.8 million write-down, representing the full remaining value of its investment in Choice, to reflect the "continued deterioration" of the franchise's credit quality, according to securities filings.

Futures soar after U.S. takes over GSEs - (www.reuters.com) Stock index futures surged on Sunday, pointing to a sharply higher open when Wall Street opens on Monday, after the U.S. government seized control of troubled mortgage finance companies Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News). The takeover, the latest move by the government to shore up the slumping housing market, was taken to ward off more global financial market turbulence. While this is seen a major step to stabilize the financial system, persistent problems stemming from the housing slump will make a sustained rally unlikely, investors said. "I expect there will be a powerful knee-jerk rally but we won't be heading into a full-blown bull market," said Jim Awad, chairman of W.P. Stewart & Co Ltd in New York. S&P 500 futures rose 27.8 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 212 points and Nasdaq 100 futures gained 38 points.

Few Stand to Gain on This Bailout, and Many Lose - (www.nytimes.com) Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers. Skip to next paragraph But even after the government seized the mortgage finance companies on Sunday and dismissed their chief executives, the companies’ outgoing leaders could see big paydays — a prospect that angers many investors, particularly because ordinary stockholders could be virtually wiped out. Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be “without cause,” according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm. Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company’s troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.

Loan Giant Overstated the Size of Its Capital Base - (www.nytimes.com) The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend, came together hurriedly after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter. As a result of the government’s intervention, the cost of borrowing for Fannie Mae and Freddie Mac should decline, because the government will be standing behind their debts. Equally important, because the government is backing the companies, their buying and selling of loans will continue. But the plan to bail out the firms will probably do little to stop home prices from falling further. And foreclosures are almost certain to rise.

Regulators to Help Banks With Fannie, Freddie Shares - (www.bloomberg.com) U.S. regulators said they will help develop plans to restore capital at banks with ``significant'' holdings in Fannie Mae and Freddie Mac after the government seized control of the two mortgage-finance companies. The Federal Reserve and three other banking agencies ``are prepared to work'' with smaller banks whose stakes in Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac represent a large share of their capital, the regulators said today in a joint news release. The Treasury Department and the Federal Housing Finance Agency today placed the companies under a so-called conservatorship, replacing their chief executives and eliminating dividends. Common stockholders of the government- sponsored enterprises, weakened by a surge in mortgage defaults, will be last in line for any claims, Treasury Secretary Henry Paulson said at a Washington news conference. Preferred shareholders will be second in absorbing losses, he said. The takeover is ``unambiguously bad'' for preferred shareholders who, along with holders of common stock, ``will in all likelihood be wiped out,'' Gimme Credit LLC analyst Kathleen Shanley said today in a statement. ``The government opted not to sweeten the pill for bank holders of preferred stock,'' in a move ``likely to set a precedent for any future rescue transactions,'' Shanley said.

WaMu ousts CEO Killinger: report - (www.reuters.com) Washington Mutual Inc has ousted Kerry Killinger as its chief executive, and will replace him with Alan Fishman, who is now chairman of mortgage broker Meridian Capital Group, the Wall Street Journal reported on its website on Sunday. Killinger was told last Thursday by WaMu's board chairman, Stephen Frank, and another director that the board had concluded he should retire, the Journal reported, citing unnamed sources.

Treasury to Buy $5 Billion in Mortgage Backed Securities - (www.cnbc.com) The current limit on the quarterly preferred stock purchases of $100 billion per institution was a figure chosen "to provide market stability", they added. The officials insisted the federal takeover of the two government-sponsored enterprises was not analogous to a bank failure, in which an insolvent institution is put into receivership and its deposits shifted to other banks and its shareholder equity eliminated. They said Fannie Mae and Freddie Mac would continue as going concerns and common and existing preferred shareholders would not be wiped out.




Other Stories:

U.S. Takes Over Mortgage Fraud Titans in "Rescue" - (www.nytimes.com)
Freddie, Fannie Bailouts Are Going to Cost Us Dearly - (dadtalk.typepad.com)
Taxpayer Fannie, Freddie Losses May Be $300 Billion, Fed's Poole Says - (www.bloomberg.com)
Real US Housing Losses Are $6 Trillion - (www.financialsense.com)
State capitalism - (en.wikipedia.org)
Fannie, Freddie were blind to the bubble - (news.yahoo.com)
Delinquencies, foreclosures rise to more than 9 percent of US home loans - (biz.yahoo.com)
Mortgage Foreclosures, Delinquencies Reach Highs - (www.bloomberg.com)
A Miami Foreclosure Sells at 40% of Previous Sale - (eyeonmiami.blogspot.com)

New Auto Prices Fall At Record Rate - (Mish at globaleconomicanalysis.blogspot.com) The average cost of a new vehicle in the second quarter was $25,632 -- a 2.3% decline from the year-earlier period and the steepest drop recorded in the bank's 41-year-old survey. The price drop comes as automakers are already coping with mounting losses and declining sales. Carmakers are shifting away from trucks and sport utility vehicles, which command high profit margins, toward manufacturing smaller cars, which are less profitable.

Bill Gross Wants Treasury To Buy Assets To Prevent Tsunami - (Mish at globaleconomicanalysis.blogspot.com) Bond king Bill Gross is back preaching socialism today, stating U.S. Must Buy Assets to Prevent Tsunami. The U.S. government needs to start using more of its money to support markets to stem a burgeoning "financial tsunami," according to Bill Gross, manager of the world's biggest bond fund. Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's Web site today. "Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami," Gross said. "If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury." The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. My Comment: It is preposterous to propose the government should bail out private investors. It has been tried many times and it has failed every time. The Greenspan Fed frequently bailed out banks and investors. We are now bearing the fruit of past misguided bailouts. The housing bubble we are in is a direct result of the Fed attempting to bail out banks in the wake of the dotcom bubble. The dotcom bubble was fueled by an imaginary threat called Y2K as well as a previous bailout of Long Term Capital Management. Banks do stupid things when they are constantly being bailed out of their mistakes.
Median Kaua'i condo price down 53 percent - (www.honoluluadvertiser.com)
Housing Prices: Bottom or Temporary Bear Break? - (www.seekingalpha.com)
Mortgage Stats - (PDF - mortgage.freedomblogging.com)
Surge in Joblessness May Deepen US Housing Slump - (www.cnbc.com)
Last Year's Fed Housing Symposium - (www.kansascityfed.org)
Stop the Bailouts - (www.youtube.com)
Take Action! - (www.fedupusa.com)

National City Pays Customers To Cancel Credit Lines - (Mish at globaleconomicanalysis.blogspot.com) National City (NCC), the US bank that has been among the hardest hit by the subprime crisis, is trying to reduce its exposure to the riskiest category of home loans by offering customers cash to close their untapped home equity lines. Lenders such as National City have tightened their lending standards and reduced lending volumes sharply, but portfolio exposures could still grow as a result of so-called “open-ended” home equity lines that are committed but as yet undrawn. The bank’s initiative, which was launched at the end of July, encourages National City customers to surrender their unused home equity lines by waiving fees it would normally charge for closing the line and by writing customers a $200 cheque. That someone should ever have to pay $350 to close a credit line is of course completely silly. But it is very telling that NCC is willing to pay customers $200 to not tap those lines. I don't doubt that most customers are pleased by this.“We are giving customers an opportunity to close their lines without incurring termination fees and then we give them a reward to thank them for their business,” said National City.

Wells Fargo Sham Revealed- (Mish at globaleconomicanalysis.blogspot.com) Sham Revealed: Yesterday Wells Fargo (WFC) raised $2 billion in a bond offering. The cost of the capital? 9.75%. When the top rate it can lend at is 6% the only way it can make money on this capital is to lever it.... increase the risk. I ask you, why would a company that just raised its dividend go out and raise dilutive capital (the cost of the capital will be a drag on earnings)? Since the only reason is to get capital ratios back in line, something a dividend cut might have done, we can clearly see that the dividend raise was a sham to make things look better than they are. Financial companies are in worse shape, not better, than they were a few months ago. They desperately need to raise capital and anyone buying stocks at these levels is taking a huge risk that they will be caught in the middle of that process. Risk is high.

Bernanke the idiot (or liar)just weeks ago said Fannie & Freddie were fine - (housingpanic.blogspot.com) "At what point is enough enough? At what point do you completely lose trust in your elected (and unelected) officials in charge of our government and our economy? Or has that point come and gone?"
Washington Mutual Forces Out CEO - (www.ml-implode.com) - Kerry Killinger, who helped build Washington Mutual Inc. into the nation's largest thrift and then presided over its rapid decl...
Paulson Rolls The Dice At Taxpayer Expense - (Mish at globaleconomicanalysis.blogspot.com) - To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size. My Comment: That statement clearly spells out that increasing systemic risk will be ignored at a "modest rate" through the end of 2009. Then, assuming one believes the second statement (I don't) the portfolios will be reduced at a rate of 10% a year starting in 2010. This implies banks will be in condition to start taking over where GSEs left off in 2010. I doubt it.
Update: Downy Savings and Loan - (www.ml-implode.com) - "Nothing to see here folks," was the sentiment of Downey officials echoed in news accounts. Although Downey touts this as a...
Return of the 'Super Dollar'? - (www.ml-implode.com) - Only US Treasury bonds are keeping pace with the dollar, achieving a gain of their own – and therefore pushing bond yields lower...
Take A Load Off Fannie: Bailout Or Nationalization For The Mortgage Giants? - (www.ml-implode.com) - A thoughtful article with new suggestions. I am less confident that a new HOLC could manage to actually turn a profit, since th...

Treasuries Decline After U.S. Takes Control of Fannie, Freddie - (www.bloomberg.com)
Asian Stocks, U.S. Futures Rally on Fannie, Freddie Takeover - (www.bloomberg.com)
Paulson Engineers U.S. Takeover of Fannie, Freddie - (www.bloomberg.com)
Paulson Plans to Bring Fannie, Freddie Under Government Control - (www.bloomberg.com)
U.S. Rescue Seen at Hand for 2 Mortgage Giants - (www.nytimes.com)
Treasury Extends Secured Credit Line to Federal Home Loan Banks - (www.bloomberg.com)
Asset-based borrowing on the rise - (www.ft.com)
Volcker Says Finance System `Broken,' Losses May Rise - (www.bloomberg.com)
US takes control of Fannie and Freddie - (www.ft.com)
U.S. home foreclosures hit record level, boosted by California - (www.latimes.com)
Jobless Rate In August Hit A 5-Year High - (www.washingtonpost.com)
Treasury to Rescue Fannie and Freddie - (www.washingtonpost.com)
Fannie, Freddie blind to the bubble - (www.ap.com)
Long-Term Capital: It’s a Short-Term Memory - (www.nytimes.com)