KeNo's Housing and Economic Portal: Wednesday January 20 Housing and Economic stories

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TOP STORIES:

Bankruptcy fears hit Japan Air as government mulls aid - (www.reuters.com) Shares in Japan Airlines Corp tumbled on Friday as media reports and comments from government officials heightened fears Asia's biggest carrier by revenue will file for bankruptcy as part of a state bailout. Negotiations have dragged on for months as company officials, employees, policymakers, investors and even pensioners grapple over JAL, with a bankruptcy for the debt-laden and loss-making airline looking increasingly likely. A state-backed fund is in talks with the government and creditors on a plan to support JAL with yet more cash if it files for bankruptcy and can get debt forgiveness from its banks, sources have told Reuters. The case for a court-led restructuring, which would likely slash the value of JAL's shares, appeared to gather momentum on Thursday when Japan's new finance minister said he expected the fund to support JAL. Transport Minister Seiji Maehara told reporters on Friday, however, he had not heard from the fund that a court-led bankruptcy was a premise of JAL's restructuring. JAL shares slumped 13 percent, extending losses this week to as much as 30 percent and cutting the airline's market value to below $2 billion from more than $6 billion a year ago.

FirstFed Financial files for bankruptcy - (www.reuters.com) FirstFed Financial Corp (FFED.PK) filed for Chapter 11 protection in a California bankruptcy court less than a month after its banking unit was shut down by federal regulators. The company listed assets of $4.8 million and liabilities of $159.7 million in court papers filed on Wednesday. OneWest Bank, formerly failed mortgage lender IndyMac, bought 39 branches of FirstFed's bank in December. In addition to assuming $4.5 billion in total deposits, OneWest, of Pasadena, Calif., agreed to buy essentially all of First Federal's assets of $6.1 billion.

Fed Plan to Stop Buying Mortgages Feeds Recovery Worries - (online.wsj.com) The Federal Reserve's pledge to stop buying mortgages by the end of March is sparking fears among home builders, mortgage investors and even some Fed officials that mortgage rates could rise and knock the fragile housing recovery off course. Rates on 30-year fixed-rate mortgage have risen by a quarter of a percentage point in the past month to around 5.2%, according to HSH Associates, near their highest levels since September as the bond market has pushed up long-term interest rates amid signs of an improving economy. The recent rise in mortgage rates could be a prelude to even bigger increases in coming months as the Fed steps away from support for the market. That prospect has some in the markets counting on the Fed to change course and keep buying past March, which many officials are reluctant to do. When such a big investor stops buying, "that could lead to material increases in [interest] rates across the board," said Ronald Temple, portfolio manager at Lazard Asset Management. He sees mortgage rates rising by a percentage point when the Fed stops buying. A withdrawal of government support, combined with high unemployment and rising mortgage foreclosures, could push home prices down 20%, he said. The Fed now holds $909 billion of mortgage-backed securities. In the past year it has purchased 73% of the mortgages that government-backed Fannie Mae, Freddie Mac and Ginnie Mae have turned into securities. Purchases by the Treasury pushed total government purchases above $1 trillion. The Fed says it plans to top off its purchases at $1.25 trillion by the end of March, but must decide in the months ahead whether the economy is strong enough to stick with that plan.

Bond investors wary of QE’s end - (www.ft.com) In the US and UK, bond investors are watching anxiously as central banks prepare to end their purchase policies known as quantitative easing. The nervousness centres on one big question: just how high will bond yields rise this year, as last year’s big buyers of debt depart from the scene. And do private investors have the capacity to take the central banks’ place? While an improving economy can cope with rising bond yields, there comes a point when sharply higher interest rates threaten a nascent recovery in activity, particularly for the US housing market. As such, while QE is set to end early this year, it could well return in order to prevent higher yields damaging the recovery. The US Federal Reserve is scheduled to end its QE programme in March. But this week minutes from its December policy meeting disclosed that officials were worried that ending QE then might undercut recent improvements in the housing sector. It suggests the Fed is distinctly more cautious about the outlook for the economy in 2010 than perhaps the equity or commodity markets, both of which seem to be banking on a V-shaped economic recovery. All of which potentially sets up 2010 as a year where bond markets flip 180 degrees more than once, fearing the end of QE and higher rates, only to rally sharply, should the economy lose steam, raising the prospect of a double-dip recession.

Europe’s Jobless Rate Unexpectedly Hits 11-Year High - (www.bloomberg.com) Europe’s unemployment rate unexpectedly increased to 10 percent, the highest in more than 11 years, as companies cut costs in the wake of the worst recession in more than six decades. November’s euro area jobless rate rose from a revised 9.9 percent in October, the European Union statistics office in Luxembourg said today. That’s the highest since August 1998. Economists forecast a November rate of 9.9 percent after the 9.8 percent initially reported for October, a Bloomberg survey showed. The euro-area economy expanded 0.4 percent in the third quarter from the previous three months, according to a separate report. European companies are cutting jobs and paring wages to shore up earnings battered by the global slump. While economic confidence has risen to a level last seen before the 2008 demise of Lehman Brothers Holdings Inc., a surge in energy costs and a stronger euro threaten to damp the recovery.

Investors wait to see who fills US mortgage hole - (www.ft.com) As the US Federal Reserve pulls back from the mortgage market, will the government and its proxies, Fannie Mae and Freddie Mac, pick up the baton? Many investors are looking to Fannie and Freddie to play an expanded role in the market for mortgage-backed securities (MBS) – helping to keep the market liquid and mortgage rates low – as the Fed completes its $1,250bn (£780bn) purchase programme. This is mitigating concerns, expressed by some Fed officials in the minutes of the US central bank’s December 15-16 policy meeting released this week, that the scheduled winding down of Fed purchases of MBS by March 31 could “undercut” a fragile housing recovery. Since the Christmas eve announcement that the government was increasing the effective caps on the amount of assets Fannie and Freddie are allowed to hold, spreads on MBS have narrowed to record low levels. However, the US Treasury officials say it is not their intention that Fannie and Freddie should become large net buyers of securities – rather, they want to ensure these enterprises are not forced sellers at a time when the Fed is pulling out. Inside the Fed, policymakers disagree as to how big an impact the end to MBS purchases will have. This relates to longstanding arguments as to whether the stock or flow of purchases influences mortgage rates – and the extent to which Fed buying crowded out private activity. Fed doves want to ensure the central bank keeps open the option of expanding MBS purchases if the economic outlook deteriorates or mortgage rates spike. However, another group is keen for the government and its proxies to take on full responsibility for housing and mortgage-related issues. That would allow the central bank to focus exclusively on the general macroeconomic outlook, and increase MBS purchases only if that outlook deteriorated sharply.

U.S. Warns Banks to Guard Against Rate-Rise Risks - (www.bloomberg.com) - (www.bloomberg.com) U.S. regulators including the Federal Reserve warned banks to guard against possible losses from an end to low interest rates and reduce risk or raise capital if needed. “In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates,” the Federal Financial Institutions Examination Council, made up of agencies including the Fed and the Federal Deposit Insurance Corp., said in a statement today. Several U.S. central bankers have called for raising interest rates at a faster pace than increases in the past, while the Fed hasn’t said when or how quickly it plans to lift short-term borrowing costs from a record low. Lower rates helped lead to record quarterly profits at large banks such as Goldman Sachs Group Inc. and Wells Fargo & Co.

OTHER STORIES:

Stock futures skid as job losses exceed estimates - (finance.yahoo.com)

Treasuries Gain as Economy Unexpectedly Loses Jobs in December - (www.bloomberg.com)

PBOC Begins Stimulus Exit, May Raise Main Rate in Third Quarter - (www.bloomberg.com)

Big Deficits Cloud Britain's Future - (online.wsj.com)

India 2009 Car Sales Rise Most in Three Years on Economy, Rates - (www.bloomberg.com)

Contrarian Investor Sees Economic Crash in China - (www.nytimes.com)

China CSRC Confirms It Has Approved Margin Trading - (www.bloomberg.com)

Payrolls in U.S. Drop 85,000 in December; Unemployment Is 10% - (www.bloomberg.com)

Rising gas prices could be a drag on economic recovery - (www.washingtonpost.com)

Fed Advice to A.I.G. Scrutinized - (www.nytimes.com)

Fed officials see inflation risks - (www.reuters.com)