KeNo's Housing and Economic Portal: Monday October 12 Housing and Economic stories

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Spain Tips into dpression - (www.telegraph.co.uk) Spain is sliding into a full-blown economic depression with unemployment approaching levels not seen since the Second Republic of the 1930s and little chance of recovery until well into the next decade, according to a clutch of reports over recent days. The Madrid research group RR de Acuña & Asociados said the collapse of Spain's building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11pc of GDP. The grim forecast is starkly at odds with claims by premier Jose Luis Zapatero, who still says Spain's recession will be milder than elsewhere in Europe. RR de Acuña said the overhang of unsold properties on the market, or still being built, has reached 1,623,000 . This dwarfs annual demand of 218,000, and will take six or seven years to clear. The group said Spain's unemployment will peak at around 25pc, comparable to the worst chapter of the Great Depression. Spanish workers typically receive 50pc to 60pc of their former pay for eighteen months after losing their job. Then the guillotine falls. Spain's parliament has rushed through a law guaranteeing €420 a month for long-term unemployed, but this will not prevent a social crisis if the slump drags on. Separately, UBS said unemployment will reach 4.8m and may go as high as 5.4m if the job purge in the service sector gathers pace. There is the growing risk of a "Lost Decade" akin to Japan's malaise after the Nikkei bubble. Roberto Ruiz, the bank's Spain strategist, said salaries must fall by 10pc in real terms to regain lost competitiveness, replicating the sort of wage squeeze seen in Germany after reunification. There is no sign yet that either Spanish trade unions or the Zapatero government are ready for such draconian measures. Talks between the unions and Spain's industry federation (CEOE) broke down in acrimony in July. Mr Ruiz said the construction sector will shrink from 18pc of GDP at the peak of the boom to around 5pc, making it unlikely that there will be any significant recovery before 2012. Even then growth will be "slow, weak, and fragile". The Spanish government can do little to cushion the downturn. "The room for manouvre in fiscal policy has been exhausted," said Mr Ruiz. The rocketing cost of jobless benefits has added 3pc of GDP to the budget deficit. Mr Zapatero has ordered all ministries to cut 8pc of discretionary spending to help plug the gap left by collapsing tax revenues. The axe is likely to fall on research and big projects such as high-speed railways.

Bank Bailout Reject Embraced by Declawed Tiger: - (www.bloomberg.com) Ireland is providing a case study for what might have been if former U.S. Treasury Secretary Henry Paulson had gone ahead with a plan to buy banks’ hard-hit assets. Irish taxpayers are guinea pigs in a government experiment to buy property loans from banks at prices higher than market values yet lower than the amounts banks carry them for on their books. Although markets are reactingfavorably, there’s a good chance taxpayers will get stung. If that happens, it will again show that governments need to confront head-on the troubles facing banks and economies, rather than hope time and taxpayer money will solve the problems. That’s especially important since some investors believe the Irish plan may provide a blueprint for banks across Europe. So far, most nations have balked at making banks face up to their ailments directly. And they have been loathe to make creditors feel pain, wary of the mayhem that followed the collapse of Lehman Brothers Holdings Inc. Ireland is no different. Banks such as Allied Irish Banks PLC and Bank of Ireland PLC are saddled with billions of euros of troubled real-estate loans. Rather than force bank shareholders or creditors to bear the brunt of these losses, the Irish government is trying the kind of switcheroo Paulson wanted to pull off. Pricing Pickle: Recall that Paulson first proposed that the Troubled Assets Relief Programbuy toxic assets from banks. The idea was that TARP would unclog balance sheets and revive lending. That’s also the stated purpose of the Irish plan. Price proved to be the sticking point in the U.S. last fall. Pay too much for the assets and it’s a stealth recapitalization of banks, and their shareholders, using taxpayer money. Banks, on the other hand, didn’t want to sell at low prices for fear that resulting hits to profit and equity might wipe them out. The issue was never fully resolved as the U.S. Congress needed two tries to pass the plan. Then Paulson did an about- face and decided to use the $700 billion in TARP funds to purchase equity in banks. Since then, the idea of the government buying assets from banks has fizzled. Ireland is following the original TARP blueprint. Irish Finance Minister Brian Lenihan last week announced that a special agency would buy 77 billion euros ($113 billion) of assets from five lenders. In doing so, the government would pay about 70 percent of the assets’ carrying value, or about 54 billion euros. No Good Options: While that seems like a big haircut, the price might be as much as 15 percent above the assets’ estimated market value of about 47 billion euros.

Reminder that Despite Hopes, Anxiety Bedevils Housing - (blogs.wsj.com) This morning came a fresh reminder that foreclosures and anxiety still bedevil the U.S. housing market, despite many investors’ hopes for an imminent rebound. As KB Home reported a $66 million loss for its fiscal third quarter ended Aug. 31, CEO Jeff Mezger gave this diagnosis: “While tentative indications are that some negative economic trends are slowing or leveling out to varying degrees in certain markets, the ongoing impact of and the potential for increased foreclosures and mortgage delinquencies, higher unemployment, tighter credit standards, and relatively weak consumer confidence make the timing and extent of a sustained rebound still uncertain.” Or, as the blues singer Robert Cray put it more succinctly, “The forecast calls for pain.” KB’s caution is in line with our report this week on the huge number of delinquent mortgage loans that haven’t even started the foreclosure process yet. The danger is that several million additional foreclosed homes will hit the market over the next few years. At a minimum, the foreclosure overhang is likely to dampen any recovery, and it could tip house prices sharply downward again in areas where foreclosures are concentrated, such as Florida, California, Arizona and Nevada. Also this morning, the government-backed mortgage investor Freddie Mac disclosed that 3.13% of the single-family loans it owns or guarantees were 90 days or more overdue in August, up from 2.95% in July. No sign of leveling off yet there. Earlier this week, the National Association of Realtors reported a 2.7% dip in August sales of previously occupied homes from July’s level, on a seasonally adjusted basis, and Toll Brothers announced a nationwide blue-light special on luxury houses. Unless extended, a tax credit that has spurred sales will end Nov. 30. While investors and first-time buyers have shown enthusiasm for snapping up foreclosed homes at the lower end of the market, there’s still a big glut of houses at the higher end, where financing can be much harder to line up.

Be wary of buying into houseowner association - (www.sfgate.com) It has always been wise to take extra care when buying a house or apartment in a community governed by its owners. But nowadays, with so many people behind on their mortgage payments, even a fire-sale price from a desperate seller could quickly lose its luster if too many 0f your new neighbors haven't been paying their share of the cost to operate the community. If that turns out to be the case, says Richard Swerdlow of Condo.com, a Coconut Grove, Fla., marketplace for condominiums, you could be hit with a big and unexpected assessment, significantly higher dues or possibly both. "Every day we get e-mails - it's got to be in thousands - about condo boards that are struggling to pay their bills," says Swerdlow. "So it's either make everybody pay more or curtail or even discontinue services." Substantial liabilities: While there are advantages to living in a place where all the owners share the cost of operating and maintaining amenities individual owners couldn't afford on their own, it's also true that condo and homeowner associations obligate all members with substantial financial and legal liabilities. Even if only a few people are behind on their association dues in the community you are considering, it's still possible that the place is vastly underfunded, according to Richard Thompson, president of the Association of Professional Reserve Analysts. Check on reserves: Though there are no hard numbers to back him up, Thompson estimates that as many as 90 percent of the nation's half-million homeowner associations don't have the cash on hand to take care of necessary maintenance and repairs. "There are laws in the big condo states like California, Florida and Virginia that require associations to maintain reserves," says Thompson, whose Portland, Ore., firm Regenesis Inc. helps associations create plans to maintain and fund their commonly owned elements. "But in most states - I'd say 80 percent - most associations have no reserves." Worse, perhaps, is the fact that trying to determine whether the place you are considering is on stable financial footing is difficult.

Freddie Mac hands out big bonus to new CFO (replacing suicide CFO) - (www.footnoted.org) Last we checked, Freddie Mac (FRE) was still operating under a conservatorship, having received over $51 billion in taxpayer money. And, we seem to recall lots of chest-beating last year about sharply lower salaries and fewer perks for the new group of top executives charged with setting Freddie (and Fannie Mae) back on the path to prosperity. So you can imagine our surprise when we came across this employment contract yesterday for Freddie’s newly named CFO, Ross J. Kari. Here’s a few key bullets: annual compensation of $3.5 million (this includes $675K in salary, $1.6 million in something called “additional annual salary” and $1.1 million in a target incentive

· a $1.95 million signing bonus

· immediate buyout of Kari’s house (or perhaps houses)

· reimbursement for travel between Washington D.C. and Kari’s residences in Ohio, Washington and Oregon

Needless to say, none of this — and certainly not the ridiculous sounding additional annual salary — was included in the press release that Freddie put out earlier this week. But Freddie CEO Charles Haldeman Jr. did say this: “Ross will be leading a proven group of finance executives who continue to strengthen our financial controls. When I came to Freddie Mac I said that building out our senior executive team was near the top of my agenda, and with a new CFO and COO both now on board, we’ve met that goal.” No doubt that Kari is a talented executive — one who clearly gets around. He spent the past 10 months at Fifth Third Bancorp (FITB) where he was paid substantially less working for the private sector: $580K plus a $100K signing bonus when he joined the bank last November. Before that, he was at insurance giant Safeco, which was bought by Liberty Mutual last year.

Rep. Grayson (Dem.): "Has the Fed Ever Tried to Manipulate the Stock Market?" - (www.dvorak.org) Good video. This is Rep. Alan Grayson asking Federal Reserve General Counsel Scott Alvarez about the Fed’s independence. Having posted another of his withering questioning sessions before, Graysonseems to be someone to watch. It’s quite refreshing to see government officials squirm under his questioning. Remember the days when the Main Stream Media had the balls to do that? Can also see the video on YouTub: http://www.youtube.com/watch?v=mXmNpdYpfnk&feature=player_embedded