KeNo's Housing and Economic Portal: Sunday September 20 Housing and Economic stories

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Global Pension Funds Shed $1.5 Trillion on Crisis, Study Shows - (www.bloomberg.com) The world’s 300 largest pension funds shed $1.5 trillion last year as the financial crisis reduced the value of their holdings, a study by consultant Watson Wyatt Ltd. and Pensions & Investments journal showed. The decline amounts to 13 percent and left the holdings of the funds at $10.4 trillion at the end of 2008, according to the report released today. The MSCI World Index of stocks reached a 14-year low on March 9, reflecting the fallout from the global credit crisis and an unprecedented series of bank bailouts following the bankruptcy of Lehman Brothers Holdings Inc. last September. The MSCI index has since recovered, gaining by more than half from its low. “The world’s largest pension funds were not exempt from the economic crisis and have been set back a number of years,” Carl Hess, global head of investment consulting at Watson Wyatt, said in the report. “They will now be focusing even more on risk management and reassessing their governance arrangements.”

Mortgage Market Bound by Major U.S. Role - (www.washingtonpost.com) In the go-go years of the U.S. housing boom, virtually anybody could get a few hundred thousand dollars to buy a home, and private lenders flooded the market, aggressively pursuing borrowers no matter their means or financial history. Now the pendulum has swung to the other extreme. Only one lender of consequence remains: the federal government, which undertook one of its earliest and most dramatic rescues of the financial crisis by seizing control a year ago of the two largest mortgage finance companies in the world, Fannie Mae and Freddie Mac. While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government's newly dominant role -- nearly 90 percent of all new home loans are funded or guaranteed by taxpayers -- has far-reaching consequences for prospective home buyers and taxpayers. The government has the power to decide who is qualified for a loan and who is not. As a result, many borrowers among both poor and rich are frozen out of the market. Nearly one-third of those who obtained home loans during the boom years of 2005 and 2006 couldn't get one today, according to mortgage industry analysts. Many of these borrowers were never really able to afford their homes and should not have gotten loans. But many others could, and borrowers like them are now running into tougher government standards. At the same time, taxpayers are on the hook for most of the loans that are still being made if they go bad. And they are also on the line for any losses in the massive portfolios of old loans at Fannie Mae and Freddie Mac, which own or back more than $5 trillion in mortgages. There is growing evidence that many loans being guaranteed by the government have a significant risk of defaulting. Delinquencies are spiking. And the Federal Housing Administration, another source of government support for home loans, is quickly eating through its financial cushion as losses mount. The outlay has already reached about $1 trillion over the past year and is rising. During that time, the government has pumped more money into the mortgage market than has been spent on Medicare or Social Security or the defense budget, more even than Washington has paid to bail out banks and other struggling companies. "Absent government intervention, there would be no lending," said Nicolas P. Retsinas, director of Harvard University's center for housing studies. Government officials generally agree that it would be better for private lenders to resume their traditional role as major providers of finance for home loans. But policymakers now face some tough choices. They must decide how to reduce support for the mortgage market without letting it collapse. And they must decide what kind of support the government should provide in the long run.

* * Video: Ron Paul on the Coming Catastrophe & Global Realignment * * - (www.dailypaul.com)

Mexico water shortage becomes crisis amid drought - (www.latimes.com) Crops are wilting in the countryside, and the capital's water shortage has turned dire as Mexico grapples with its worst drought in more than half a century. In the parched Mexican countryside, the corn is wilting, the wheat stunted. And here in this vast and thirsty capital, officials are rationing water and threatening worse cuts as Mexico endures one of the driest spells in more than half a century. A months-long drought has affected broad swaths of the country, from the U.S. border to the Yucatan Peninsula, leaving crop fields parched and many reservoirs low. The need for rain is so dire that water officials have been rooting openly for a hurricane or two to provide a good drenching. "We really are in a difficult situation," said Felipe Arreguin Cortes, deputy technical director for Mexico's National Water Commission. This is supposed to be Mexico's wet season, when daily rains bathe farmland and top off rivers and reservoirs. But rainfall has been sporadic and unusually light -- the result, officials say, of an El Niño effect this summer that has warmed Pacific Ocean waters and influenced distant weather patterns. Mexico's hurricane season has been mild, with no major hits so far this summer, though a weak Hurricane Jimena dropped plenty of rain on parts of Baja California and the northwestern state of Sonora last week. The sparse rainfall nationwide has made 2009 the driest in 69 years of government record-keeping, Arreguin said. Though nearly two months remain before the rainy season ends in October, the drought is an unwelcome blow to an economy already laboring under a recession that has crimped exports and cost hundreds of thousands of jobs. Mexican growers report more than $1 billion in losses from crops planted during spring, in anticipation of seasonal rain. Hard hit have been corn, beans, barley and sorghum, plus livestock. Farmers and officials say the impact, including lost earnings, unpaid debts and shortages of staple foods, could be felt well into next year. "Although no one wants to recognize it, there is a food crisis," said Cruz Lopez Aguilar, president of a national federation representing rural dwellers. He and others say increasing imports to make up for lost crops could raise food costs. Mexican officials downplay the severity, saying lost production can be offset during the fall growing cycle, when crops are irrigated and rely less on direct rainfall. A federal government insurance program is meant to cover farmers affected by drought.

Daniel Borenstein: CalPERS chief actuary silenced for telling truth - (www.contracostatimes.com) THE CALIFORNIA PUBLIC Employees Retirement System is trying to tamp down public concern after its chief actuary candidly said last month that government pension costs are "unsustainable." The portfolio value of the nation's largest public pension fund, battered by the stock market and the real estate downturn, declined about 24 percent, or roughly $58 billion, in the fiscal year that ended June 30. The system serves 1.6 million public employees, retirees and their families across the state. They need not worry. Their pensions won't be affected. Instead, state and local governments across California will have to cut services — or, less likely, raise taxes — to make up for the losses if the economy doesn't come roaring back. CalPERS is trying to soften the blow by forcing future generations to absorb a larger part of the hit. Nevertheless, the impact will start to be felt with the 2011-12 fiscal year. Pension costs are typically measured as a percentage of payroll. Government agencies in CalPERS, for example, currently set aside for pensions about 17 percent of payroll for most workers, what are known as "miscellaneous" employees, and about 27 percent for police and firefighters. At a seminar in Sacramento, Ron Seeling, the chief actuary, described what's to come. "I don't want to sugarcoat anything," Seeling said. "We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else's — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) "... unsustainable pension costs. We've got to find some other solutions." It was at least the second time Seeling made the comments, but the first time they were widely disseminated. Credit Ed Mendel, who runsCalpensions.com, with capturing Seeling's comments and publishing them. Some newspaper editorial boards around the state have picked up on the remarks and highlighted them as the first public admission by CalPERS of what many have been warning: Pension costs are rising faster than we can afford and dependence on hefty investment returns to pay the bill is risky. At CalPERS, my request to talk to Seeling about his comments was denied. Instead, public information officers told me that he misspoke — that he reversed his clauses. What he meant to say, I was told, was "Without significant turnarounds in assets, we are facing decades of unsustainable pension costs ... " In other words, they were suggesting, he wasn't predicting long-run shortfalls, he was hypothetically speculating on what would happen if markets fail to rebound. Moreover, they emphasized, it was his personal comments, not the official CalPERS position. That clarification is hardly reassuring. It shows once again that CalPERS is banking on the economy to soar back. And, somehow, we're supposed to be comforted that the comments of the chief actuary were his personal view rather than the system's official position. To be fair, until last year, CalPERS had a solid record of investment returns. And, even with last year's losses, the system has met its 7.75 percent annual investment target over the past 20 years. But the agency has been acting as if the market could only go up — and has failed to require employers to keep contributing when times were good. Thus, while the state and local governments have been approving increasingly richer pension benefits for public employees over the past decade, CalPERS has not been setting contribution rates accordingly. As a result, the pension system went from having well over 100 percent of its targeted funds at the start of the decade to 80 percent to 85 percent funded on June 30, 2008. That was before the stock market burst. The next funding reports from the agency are certain to be much worse, perhaps below 70 percent. In other words, CalPERS has failed to ensure that government agencies are paying in enough money to fully fund the promised pensions. As a result, future generations will be stuck with the bill or the resulting cuts in public services. Yet, when CalPERS's top actuary comes clean about the problem, the agency tries to silence him.