KeNo's Housing and Economic Portal: Tuesday December 22 Housing and Economic stories

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Mortgage guarantees benefit hedge funds at taxpayer cost - (www.concordmonitor.com) The New York Times recently published an account by reporter Louise Story of how hedge funds are buying up billions of dollars of mortgages in or near default, paying perhaps $40 million for $100 million in loans from lenders willing to take huge losses to clear the loans from their books. The mortgages of customers in or near default are then reduced and bundled for resale to investors. The homeowner gets lower payments, the hedge funds make a quick profit, and much of the risk winds up with taxpayers. It is an activity that needs congressional scrutiny immediately. The hedge funds dramatically write down the homeowner's balance, reducing, in one example, a $440,000 mortgage to $314,000. They then refinance the new mortgages with guarantees from the Federal Housing Administration or an another federal agency before reselling them. The loans are attractive because, should the homeowner default, the FHA, not the investor, takes most of the loss. There is an upside to this practice. It is helping people stay in their homes who might otherwise declare bankruptcy or join the ranks of the homeless. The re-mortgaged properties are not being added to the glut of unsold homes on the market, further reducing values. But often the homes were purchased by buyers who couldn't afford them in good times and never would have qualified for loans had the mortgages been written by responsible lenders rather than fast-buck artists. The FHA guaranteed about one-quarter of all the mortgages written last year and half of the mortgages of all first-time buyers, according to The Wall Street Journal. The agency is funded with premiums charged to borrowers, but if it gets in trouble, it is guaranteed an automatic government bailout. The FHA takes a tougher look at borrowing credentials than many in the lending industry. But this month, its once vast reserves fell below 2 percent of outstanding mortgages, the lowest level in seven years. The reserves are now at a level that qualifies the agency for an automatic infusion of cash from the U.S. Treasury - no prior congressional approval required. The law did not allow the FHA to sweeten the mortgage deals of the most creditworthy borrowers, as private lenders did during the housing boom, so they went elsewhere. That means the agency's portfolio includes a bigger percentage of risky loans. The new, reduced mortgages that the agency is taking on from the hedge funds is adding to that risk. Congress needs to take a hard look - now, not after the fact - at how this industry is operating. If, as Federal Reserve Chairman Ben Bernanke recently warned, the nation could be in for a double-dip recession, how much will bailing out the FHA and this new crop of distressed homeowners cost? And how much is Wall Street, which did so much to torpedo the economy through its high-risk lending practices, making on these new mortgage deals? Congress should find out.

Arrest Imminent in Florida Ponzi Case: Report - (www.cnbc.com) A disbarred Florida lawyer accused by the FBI of running a $1 billion investment scam is expected to be arrested on Tuesday on racketeering conspiracy charges, The Miami Herald reported. Scott Rothstein, who fled to Morocco in late October but returned to Florida in early November, is expected to appear before a federal magistrate in Fort Lauderdale to face the charges, the newspaper said in its online edition. It cited unidentified sources familiar with the case. Rothstein has not directly addressed the accusations, though he has said previously that he would do all in his power "to make sure that every single penny is recovered" for those who invested with him. He has not said how that would happen. Prosecutors are using the Racketeer Influenced and Corrupt Organizations Act to charge Rothstein and possibly others, the newspaper said. The conspiracy law is often used to prosecute members of organized crime, drug lords and others accused of running criminal enterprises. Rothstein, who was disbarred last week by the Florida Supreme Court, is accused of mail, wire and bank fraud, along with money laundering, the Herald said. He faces at least 20 years in prison and forfeiture of tens of millions of dollars in illegal profits if convicted. The FBI said in November that Rothstein, 47, was suspected of running an elaborate Ponzi scheme that bilked investors out of more than $1 billion. Court documents said he had been selling nonexistent legal settlements to unsuspecting investors since at least 2005, using new investor money to pay previous investors in the classic Ponzi scheme model. FBI and Internal Revenue Service agents raided his Fort Lauderdale law office and seized his waterfront home, yacht and other assets in Florida and elsewhere. The Herald said federal prosecutors would ask a grand jury to consider criminal charges against Rothstein's alleged co-conspirators, possibly including former employees of his now-defunct firm. Rothstein, a frequent contributor to political campaigns who was often photographed with politicians, had a lavish lifestyle with opulent homes and a fleet of foreign sports cars. He used his connections and charm to lure wealthy friends and patrons to invest with him.

Morgan Stanley fears England sovereign debt crisis in 2010 - (www.telegraph.co.uk) Britain risks becoming the first country in the G10 bloc of major economies to risk capital flight and a full-blown debt crisis over coming months, according to a client note by Morgan Stanley. The US investment bank said there is a danger Britain’s toxic mix of problems will come to a head as soon as next year, triggered by fears that Westminster may prove unable to restore fiscal credibility.

“Growing fears over a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK's AAA status,” said the report, written by the bank’s European investment team of Ronan Carr, Teun Draaisma, and Graham Secker. “In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” they said. Morgan Stanley said that such a chain of events could drive up yields on 10-year UK gilts by 150 basis points. This would raise borrowing costs to well over 5pc - the sort of level now confronting Greece, and far higher than costs for Italy, Mexico, or Brazil. High-grade debt from companies such as BP, GSK, or Tesco might command a lower risk premium than UK sovereign debt, once an unthinkable state of affairs. A spike in bond yields would greatly complicate the task of funding Britain’s budget deficit, expected to be the worst of the OECD group next year at 13.3pc of GDP. Investors have been fretting privately for some time that the Bank might have to raise rates before it is ready -- risking a double-dip recession, and an incipient compound-debt spiral – but this the first time a major global investment house has issued such a stark warning. No G10 country has seen its ability to provide emergency stimulus seriously constrained by outside forces since the credit crisis began. It is unclear how markets would respond if they began to question the efficacy of state power. Morgan Stanley said sterling may fall a further 10pc in trade-weighted terms. This would complete the steepest slide in the pound since the industrial revolution, exceeding the 30pc drop from peak to trough after Britain was driven off the Gold Standard in cataclysmic circumstances in 1931.

More Late on Auto Loan Payments in Third Quarter - (www.cnbc.com) More people were late with their auto loan payments in the third quarter as job losses continued, but amid rising delinquencies there are positive signs for the economy in certain states. The auto delinquency rate -- the rate at which payments fell behind 60 days or more -- edged up in the July-to-September quarter to 0.81 percent, from 0.80 in the same period last year, according to credit reporting agency TransUnion. The increase from the second quarter to the third quarter of this year was far greater, reflecting both the weak economy and seasonal trends, said Peter Turek, automotive vice president in TransUnion's financial services group. It's common for late payments to rise as the year progresses. Borrowers tend to fall behind as they focus on other spending, often getting back on track in the first and second quarters, when they can use income tax returns to bring their payments current. Car loan payments that are 60 days or more late are considered a precursor to default because of the difficulty consumers face in getting caught up. TransUnion culls its data from approximately 27 million individual credit files in its database. While average delinquency rates rose nationwide in the third quarter, the rate fell in Washington D.C. and six states: Colorado, Louisiana, Maryland, North Dakota, South Dakota and Vermont.

Soros: Major Bloodletting Ahead - (www.moneynews.newsmax.com) Billionaire George Soros believes a “bloodletting” may be in the offing for leveraged buyout firms (LBOs) and commercial real estate investors amid the worst economy in seven decades. “In commercial real estate and leveraged buyouts, the bloodletting is yet to come,” Soros said in a speech in Europe, reported by Bloomberg News. “These factors will continue to weigh on the American economy, and the American consumer will no longer be able to serve as the motor for the world economy.” Bankers across the globe have accounted for $1.66 trillion of write downs and write-offs on bad loans since the start of the credit crisis in 2007. Moody’s Investors Service reports that the global speculative default rate will peak at 12.5 percent this quarter as the U.S. and European economies struggle. The rate rose to 12 percent in the third quarter, up from 2.8 percent a year earlier, Moody’s reports. That’s nearly 10 percent in just 12 months. Soros reckons that, given these facts, the global economic recovery is “liable to run out of steam” and that a “double-dip” recession may emerge in 2011. Others agree that a double-dip recession may hit soon, but for other reasons. New York Times columnist Paul Krugman, a Nobel Prize winner, says that the double-digit unemployment rate is undermining confidence, and not just in the financial industry. With more suffering likely, the poor economic leadership of the world’s largest countries may cause a collapse of confidence among ordinary workers and businesses worldwide.

In Dubai Debt Crisis, a Test of Law and Islamic Banking - (www.nytimes.com) The debt crisis in Dubai is about to test one of the fastest-growing areas in banking, Islamic finance, and put the city-state’s opaque judicial system on trial, according to bankers and experts in finance. Many loans and bonds that comply with Shariah, or Islamic law, were issued in recent years by Dubai World, the investment arm of Dubai, and other Persian Gulf companies as oil-rich Middle East nations increased spending, and the global credit crisis fed debt investments in emerging markets. But, because there have been few major defaults in this market, there is little precedent for arbitrating the unique terms of these instruments. That is likely to create many legal issues for investors in Dubai World, which sent jitters through global markets by seeking to delay payments on $59 billion in debt. Abdulrahman al-Saleh, director general of Dubai’s finance department, said Monday that Dubai World was not guaranteed by the government, and the creditors would need to “bear some of the responsibility” for the company’s debt. Shariah-compliant investments prohibit lenders from earning interest, and effectively place lenders and borrowers into a form of partnership. Yet there are no consistent rules about who gets repaid first if a company defaults on such debt, said Zaher Barakat, a professor of Islamic finance at Cass Business School in London. The first test of what that means for investors may happen around Dec. 14, when payments on a $3.5 billion Shariah-compliant bond owed by Dubai World’s real estate subsidiary, Nakheel, come due. If Nakheel defaults on its payment, legal proceedings may be initiated.

Mortgage Modification: Bank Bailouts By Another Name? - (www.huffingtonpost.com) The big talk in Washington these days is "helping homeowners." Unfortunately, what passes for help to homeowners in the capitol might look more like handing out money to banks anywhere else. The basic story is fairly simple. Tens of millions of US homeowners are now underwater: they owe more on their mortgage than the market value of their home. The reason is that they bought homes at bubble-inflated prices earlier in the decade. Economists and other policy wonks insisted that housing was a great buy, even as house prices got ever more out-of-line with economic fundamentals. Needless to say, the Wall Street crew was eager to cash in on the mania, peddling deceptive mortgages and reselling mortgage-backed securities all over the world. These deceptive mortgages have now "reset" to higher interest rates, leaving many people unable to afford their mortgage payments. However, even at lower interest rates, homeowners who purchased houses at bubble-inflated prices would find themselves paying far more for their homes than they would to rent a comparable house. As a result, these homeowners are effectively throwing money away every time they make their monthly mortgage repayment. They would be much better off renting the same house and putting the savings in a retirement account or some other form of investment. The gaps between mortgage payments and rent can often be quite large. A study that we put out at the Center for Economic and Policy Research calculated a family that purchased a small home in Los Angeles near the peak of the bubble could save $1,640 a month by renting rather than owning. This comes to almost $20,000 a year. In Phoenix a family who purchased a home near the peak of the bubble could save $420 a month or $5,000 a year. In Miami the savings would be $1,940 a month, more than $23,000 a year. These homeowners also have no reasonable prospect of ever getting equity in their homes. In many cases they are 20% or 30% underwater, possibly owing $100,000 more than the current value of their house. Many of the people who never saw the housing bubble are arguing that house prices will return to their bubble peaks. No doubt, these people also expect a resurgence of the internet stocks of the late 1990s.