KeNo's Housing and Economic Portal: Thursday August 19 Housing and Economic stories

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Ambac Financial in bankruptcy talks; shares plunge - (biz.yahoo.com/ap) The beaten-down shares of Ambac Financial Group Inc. took another pounding Tuesday after the bond insurer said it is negotiating a bankruptcy deal. The once high-flying stock fell 21 cents, or 22 percent, to 68 cents in Tuesday trading. In March 2007, Ambac shares topped $95. But the company has been awash in losses related to the collapse of the mortgage market since shortly after hitting that peak, and has been trading under $2 for most of the past two years. The New York Stock Exchanged warned last month it may delist the stock because it's been trading under $1. In a regulatory filing accompanying its second-quarter results late Monday, Ambac said management believes has enough cash to last another year, but could not guarantee it won't run out sooner. It listed $56.7 million in cash and cash equivalents on its balance sheet for the quarter ended June 30. The New York-based company said it is looking to raise new capital, and is also trying to restructure its outstanding debt through a prepackaged bankruptcy proceeding. A prepackaged bankruptcy typically involves a deal worked out with creditors that aims to reduce the length of time in bankruptcy.

Government Plans More Aid for Jobless Homeowners - (www.nytimes.com) In an acknowledgment that the foreclosure crisis is far from over, the Obama administration on Wednesday pumped $3 billion into programs intended to stop the unemployed from losing their homes. The housing market, which usually helps lead the country out of a recession, is this time helping hold the recovery back. Interest rates are at record lows, but too few can afford to buy or refinance. Unemployed homeowners who live in communities where values have fallen sharply are often unable to sell. Their foreclosures weaken neighborhoods and create a vicious circle by further undermining the market. To try to break this pattern, the Treasury Department said it was adding $2 billion to its Hardest Hit Fund, roughly doubling its size. The fund, first announced by President Obama in February and expanded in March, goes to housing finance agencies in various states to create local aid programs.

Record low mortgage rates do little for US demand - (www.reuters.com) U.S. home loan demand climbed last week but record low mortgage rates failed to light a fire in a market constrained by unemployment and tight lending practices. Mortgage purchase and refinancing applications rose by less than 1 percent in the first week of August, even as 30-year loan rates fell to 4.57 percent, the lowest in 20 years of record keeping by the Mortgage Bankers Association. This contract rate, which excludes added lender fees and points, was down from 4.60 percent the prior week and 5.38 percent a year ago, the industry group said on Wednesday. "Consumers don't have a sense of urgency right now," said Patrick Lashinsky, president and chief executive of real estate brokerage ZipRealty in Emeryville, California. "They think that interest rates seem to be continuing to go down, they don't expect home prices to go up, so instead of moving into home buying they're saving money for a down-payment, they're trying to improve their credit," he said. The U.S. housing market is still adjusting to life without up to $8,000 in tax credits, which ended on April 30 and fueled spring sales at the expense of summer activity. Many potential buyers are grappling with job loss or wage cuts, while sellers face a large pool of unqualified borrowers under more stringent lending guidelines, economists said.

U.S. Is Bankrupt and We Don’t Even Know It: Laurence Kotlikoff - (www.bloomberg.com) Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills. What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy. Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.” But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Fed Reverses Exit Plans, Sets $2 Trillion Floor for Holdings - (www.bloomberg.com) The Federal Reserve reversed plans to exit from aggressive monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated. Central bankers meeting yesterday adopted a $2.05 trillion floor for their securities portfolio, pivoting toward a quantitative target for monetary policy. Treasuries surged and stocks pared losses as some investors judged the decision opened the door to a resumption of large-scale asset purchases. “The Fed is cognizant the recovery has lost some momentum and it is still willing to intervene,” said Paul Ballew, a former Fed economist and a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio. “We always thought the exit strategy would be challenging. If you’re at the Fed, it’s proven to be more problematic than what you thought.”