KeNo's Housing and Economic Portal: Thursday September 24 Housing and Economic stories

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Wealthy Families Succumb to Bankruptcy as Real Estate Crashes - (www.bloomberg.com) Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California. More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Joseph Baldi, a Chicago bankruptcy attorney. Chapter 11 is more expensive and time-consuming for debtors and creditors than a Chapter 7 liquidation of assets. Wealthier people filing for bankruptcy typically have large homes, two car payments and children in private schools, said Leslie Linfield, executive director of the Institute for Financial Literacy in Portland, Maine, a credit-counseling and research group. “You’re living on the edge, you’re juggling those financial balls,” Linfield said. “When one ball goes, they all fall down.” Listings of homes for sale worth $1 million or more increased 27.3 percent in July from October, according to Zillow.com, a Web site that tracks real estate transactions. The number of homes sold with a value between $1 million to $2 million fell 23 percent in July from a year earlier, according to the Chicago-based National Association of Realtors. There was a 21-month supply, up from 16 months last year. Expensive Real Estate: Actor Stephen Baldwin sought voluntary Chapter 11 bankruptcy protection in July after lenders began foreclosure proceedings. Baldwin, 43, listed $1.1 million in assets and $2.3 million in debt in documents filed in U.S. Bankruptcy Court in White Plains, New York. His home is valued at $1.1 million and the banks sought to recover about $1.2 million in mortgage loans, according to court papers. “There are a lot of people with real estate, and they can’t afford it,” said Baldi, the Chicago attorney, who is scheduled to speak to the American Bankruptcy Institute on Chapter 11 next month. “They can’t make the payments, and they can’t sell the house.” About 4.3 percent of U.S. homes, or one in 25 properties, were in foreclosure in the second quarter, according to an Aug. 20 report from the Mortgage Bankers Association in Washington. That’s the most in three decades of data.

Home Prices Could Fall by Another 25%: Whitney - (www.cnbc.com) Home prices in the US could fall by another 25 percent because of high unemployment and another leg down will come for stocks, banking analyst Meredith Whitney told CNBC Thursday. "No bank underwrote a loan with 10 percent unemployment on the horizon," Whitney said. "I think there is no doubt that home prices will go down dramatically from here, it's just a question of when." Local governments and states are chronically under-funded and "most states are under water," adding to the problem of low private consumption, she said. "If you look at the drivers for unemployment I don't see that reversing very soon," Whitney said. If consumers were to decide to spend, "that would be a game-changer," but it would be an unnatural thing to do in a recession, she said. "A lot of themes are constant, which is the US consumer and the small business doesn't have any credit, credit is still contracting," Whitney said. Consumer debt and consumer credit have dropped according to the latest figures which also show that people have been spending more from their debit cards than from their credit cards. "Obviously that doesn't bode well for spending," Whitney said.

In Florida, Vestiges of the Boom - (www.nytimes.com) On the corner of Flamingo Road and Pink Flamingo Lane, beyond the putting green, the crystalline lagoon and the Sawgrass Mills mall, a soaring monument to the great condominium bust bakes under the Florida sun. The Tao Sawgrass, as the twin-towered complex is known, was built on the western fringes of Fort Lauderdale with easy money from the now tottering condo king of American finance: Corus Bancshares of Chicago. Only about 50 of the 396 units have been sold. The 26-story Tao — begun in 2006, just as the Florida real estate market imploded — is one of the many troubled condominium projects that have mired Corus in red ink and now threaten its survival. Federal authorities are racing to broker a sale of Corus to avert yet another costly banking collapse. After failing to find a buyer for the entire company, regulators are moving to cleave the bank in two and sell its banking operations and condominium loans separately. The hope is to clinch a deal by the end of the month. Some big-time real estate investors are circling, among them Thomas J. Barrack, who first made his fortune in the aftermath of the savings and loan crisis; Barry S. Sternlicht, the man behind the Starwood empire; Jay Sugarman of iStar Financial, the public real estate giant; and New York developer Stephen M. Ross, sometimes called the King of Columbus Circle, in league with Lubert-Adler, a big property investor in Philadelphia. Whatever the outcome, Corus will go down as the great enabler of condo madness, and its travails are a harbinger of the pain yet to come in the troubled world of commercial real estate. More than any other condo lender, Corus epitomized the easy lending and lax oversight of the go-go years — and the pain of the ensuing bust. Its share price, which was nearly $13 in February of 2008, has plummeted into the land of penny stocks, closing at 25 cents Wednesday. Corus barreled into hot markets like California, Florida and Nevada and then kept lending as those markets boiled over. Rather than diversify, it concentrated its lending bets by financing only a handful of big, risky projects. And it poured its idle cash into a small group of other banks and financial companies that were upended when the crisis struck. The primary regulator of Corus, the Office of the Comptroller of the Currency, failed to sound the alarm until Corus was deeply troubled. “They are the perfect analogy of a boom-bust bank,” said Jack McCabe, the head of a real estate research and consulting firm in South Florida. Corus executives, he said, behaved more like property speculators than bankers. The failure of Corus would cost an already strained Federal Deposit Insurance Corporation billions. It would also underscore the wave of troubled commercial real estate loans now threatening to crash down on much of the American banking industry. Construction and land loans are now the biggest problem for hundreds of deeply troubled lenders and pose far greater dangers than commercial loans or home mortgages, according to Foresight Analytics, a banking industry research firm.

Banks Load Up on Mortgages, in New Way‎ - (online.wsj.com) Banks have been silent partners in the meteoric rise of the Federal Housing Administration. In the past year, the nation's financial institutions have snapped up securities backed by Ginnie Mae, a government-owned agency that guarantees payments on mortgages backed by the FHA. That helped drive demand for Ginnie securities and created an outlet for billions of dollars of FHA-backed loans made to borrowers who in many cases couldn't afford big down payments. As of June 30, the roughly 8,500 federally insured banks and thrifts were holding $113.5 billion of Ginnie securities, compared with just $41 billion a year earlier, according to a Wall Street Journal analysis of bank financial disclosures. It is the largest amount that banks have reported holding since at least 1994. Banks, sometimes with the blessing of federal regulators, have been loading up on Ginnie securities for one main reason: They make their balance sheets look healthier. Since the securities are guaranteed by the government, federal banking regulators have deemed them risk-free, meaning that adding them to a bank's investment portfolio, or replacing assets deemed riskier, lowers the overall risk of the portfolio in the eyes of regulators. Some banks have used government cash infusions under the Troubled Asset Relief Program to buy Ginnie Mae bonds. Having an eager buyer for its securities has made it easier for Ginnie Mae to increase the amount of debt it issues, though there appears to be no connection between the banks' increased appetite and the increasing supply of Ginnie Mae securities. Because Ginnie Mae can issue significant amounts of securities, the FHA can back more loans and the high demand helps keep interest rates low. The irony is that banks that are reluctant to lend and are trying to unload their own mortgage holdings are at the same time helping to prop up the housing market by buying up securities backed by mortgages. Through August, Ginnie had backed $298 billion of mortgage-backed securities in 2009, the most in its 41-year history and nearly double the amount in the same period last year. That represents about 20% of total new mortgages in the U.S. In addition to FHA-backed loans, Ginnie also guarantees securities comprising mortgages backed by the Department of Veterans Affairs and other federal agencies. Ginnie and the FHA, units of the U.S. Department of Housing and Urban Development, have become two of the most powerful mortgage financiers in the U.S. When banks make home loans, the FHA insures them against default. Then the mortgages are pooled together and packaged into mortgage-backed securities. Ginnie guarantees that buyers of those securities -- including banks and other investors -- will continue to receive interest and principal payments on the debt, even if borrowers start to default. FHA Paying the Price? Over the past year, FHA has played a key role in supporting the struggling housing market by buying up mortgages made to home buyers who can't afford big down payments or homeowners who want to refinance but have little equity in their homes. The FHA may be paying a price for all its lending. Rising losses on the mortgages have drained the agency's reserves. Holding Ginnie bonds help banks look better because federal bank-capital guidelines give the Ginnie securities a "risk weighting" of 0%. That means banks don't have to hold any cash in reserve to protect against losses. By contrast, securities backed by Fannie Mae and Freddie Mac, the two mortgage giants seized by the government,carry a 20% risk weighting, meaning some cash needs to be set aside to hold them, even though most banks and investors think there is scant risk of Fannie or Freddie securities defaulting. Privately issued mortgage-backed securities can receive risk weightings of 50%, while many other types of debt carry 100%. Because of the different risk weightings, bankers say they are selling relatively safe assets like Fannie securities and replacing them with Ginnie securities. The move doesn't shrink banks' balance sheets or remove their troubled assets. But it reduces their total assets on a risk-weighted basis. That is important because risk-weighted assets are the denominator in some key ratios of bank capital. "With the pressure for capital, that's really made the Ginnie Maes more attractive," said John C. Clark, chief executive of First State Bank in Union City, Tenn. The bank's holdings of Ginnie securities jumped to $66 million at June 30 from less than $4 million a year earlier. Like some peers, First State bankrolled those purchases partly with taxpayer dollars that were intended to stabilize the banking industry and jump-start lending. The 32-branch bank used a "significant portion" of the $20 million it received through TARP to buy Ginnie securities, Mr. Clark said.

FDIC Said to Weigh Six-Month Extension for Debt Guarantee Pleas - (www.bloomberg.com) The Federal Deposit Insurance Corp. proposed a six-month, emergency-only extension to its debt guarantee program as regulators move to wean companies from federal aid approved at the height of last year’s credit crisis. The five-member FDIC board today unanimously approved seeking comment for 15 days on extending the program. The FDIC now guarantees eligible debt issued before the scheduled Oct. 31 expiration by banks that get agency approval and pay a fee. “It has been a successful program but we would like to end it,” FDIC ChairmanSheila Bair said at a Washington meeting. Credit markets are recovering and she doesn’t expect banks to need further access to the program, meaning the agency should now seek input whether to go “cold turkey” or offer an emergency mechanism for a final six months, she said. Bankers have pressed the FDIC to spell out how it will end the program, which Federal Reserve Chairman Ben S. Bernanke has said was instrumental in keeping markets stable during the worst of the 2008 financial crisis. The program is part of the Temporary Liquidity Guarantee Program; a portion for business checking accounts was extended in August for six months. “The point here is to allow for an orderly transition out of a government-backed system,” said Robert Strand, a senior economist at the American Bankers Association in Washington, in a telephone interview yesterday. The ABA had asked the FDIC to “worry about the cutoff points and the suddenness” of ending the guarantees, to make sure closing down the program doesn’t roil markets, he said. FDIC Permission: Under the limited extension, designed to help the FDIC phase out the program, banks would have to apply to the board for permission to access the aid and show that they were unable to issue non-guaranteed debt due to market disruptions or other emergency circumstances. As proposed, the emergency facility would cover debt issued through April 30, 2010, for any banks that win agency approval. The program’s debt guarantees extend through Dec. 31, 2012. “It’s a reasonable safeguard, and when things start declining again it’s helpful to have that option,” said Gregory Habeeb, who manages $7.5 billion in fixed-income assets at Calvert Asset Management Co. in Bethesda, Maryland. “The fact that it was extended is called ‘bad and good.’ The bad is that it’s still needed. The good is it’s still there if needed.” The FDIC had about $320 billion in outstanding debt guaranteed by the program as of July 31, from firms including Citigroup Inc. and General Electric Co. Regulators are weaning banks from U.S. backing by requiring them to issue debt without guarantees before repaying Troubled Asset Relief Program funds and escaping restrictions attached to the aid.