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

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Illinois faces steep tax increases to meet fiscal crisis - (www.washingtonpost.com) After years of papering over severe budget shortfalls (including while Obama was State Senator), Illinois lawmakers Friday were closing in on a plan to raise the state income tax by 75 percent and refinance roughly $8.5 billion in debt in an effort to stabilize the state's finances. The deal, still being hashed out between Gov. Pat Quinn (D) and Democratic legislative leaders, also would raise the state's corporate income tax and increase the cigarette tax by $1 a pack. Lawmakers also are discussing reviving a proposal to sell more than $3.75 billion in bonds to plug part of the gaping hole in the state's pension fund. That leaders would contemplate raising the income tax rate from 3 percent to 5.25 percent and simultaneously take on new debt speaks to an increasingly desperate financial situation. But while experts call Illinois's plight the worst in the nation, a similar scenario is playing out in many states that are grappling with the perils of air-brushing structural budget problems rather than implementing difficult tax increases or service cuts.

Bernanke Rejects Bailouts - (online.wsj.com) Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority. "We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed." The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won't be able to pay off or roll over debt. Costs have risen broadly for municipal borrowers. The market also faces challenges from the expiration of the Build America Bonds program, which helped cities and states borrow $165 billion at interest rates held down by federal subsidies. Some analysts speculate the Fed could jump into the market by purchasing muni debt or lending to struggling borrowers. The Fed only has legal authority to buy muni debt with maturities of six months or less that is directly backed by tax or other assured revenue, which makes up less than 2% of the overall market. The Dodd-Frank financial-regulation law enacted last year further tied the Fed's hands, Mr. Bernanke noted, by barring the central bank from lending to insolvent borrowers or pursuing bailouts of individual borrowers. Access thousands of business sources not available on the free web. Mr. Bernanke played down the risk of a major municipal-bond crisis, noting that muni markets have been functioning normally, with healthy trading volumes and lots of issuance. But he said that if municipal defaults did become a problem, it would be in Congress's hands, not his.

Massachusetts Ruling on Foreclosures Is a Warning to Banks - (www.nytimes.com) The highest court in Massachusetts ruled Friday that U.S. Bancorpand Wells Fargo erred when they seized two troubled borrowers’ properties in 2007, putting the nation’s banks on notice that foreclosures cannot be based on improper or incomplete paperwork. Concluding that neither institution had proved it had the right to evict the borrowers, the Supreme Judicial Court voided the foreclosures, returning ownership of the properties to the borrowers and opening the door to other foreclosure do-overs in the state. Legal experts said that while this ruling did not set a precedent for other states, the outcome will be closely watched across the country because it is the first such ruling from a state’s highest court. Investors viewed the ruling as negative for banks; an index of financial company shares fell almost 1 percent on the day. “The broad implication is you’ve got to dot your i’s and cross your t’s,” said Kathleen G. Cully, an expert in bankruptcy and lender regulatory law in New York. “You need a proper chain of title, and in both of these cases there was a gap in the chain.”

Facing Scrutiny, Banks Slow Pace of Foreclosures - (www.nytimes.com) An array of federal and state investigations into the way banks foreclose on delinquent homeowners has contributed to a sharp slowdown in foreclosures across the country, especially in hard-hit cities like this one. Over the last several months, some banks have been reluctant to seize homes from distressed borrowers, economists and government officials say, as they face scrutiny from regulators and the prospect of sanctions when investigations wrap up in the coming weeks and months. The Obama administration, in its most recent housing report, said foreclosure activity fell 21 percent in November from October, the biggest monthly decline in five years. Here in Phoenix, foreclosures fell by more than a third in the same period, reflected in the severe drop in foreclosed homes being auctioned on the courthouse plaza.

$2.6 Billion to Cover Bad Loans: It’s a Start - (www.nytimes.com) BANK investors cheered the announcement last week that Bank of America would pay $2.6 billion to buy back mortgages it had improperly sold during the housing bubble to Fannie Mae and Freddie Mac, the beleaguered mortgage finance giants. It seemed a sweet deal for the bank, whose Countrywide Home Loans unit had peddled tens of billions of dollars in risky loans to the taxpayer-owned companies. While it is unfortunate that the Bank of America deal won’t recoup much for taxpayers, the resolution could have one important benefit. It might just open the door to a much-needed reckoning of the liabilities created by questionable mortgage practices at the nation’s largest banks. These institutions have not yet made a full and realistic accounting of their liabilities. It seems clear, after all, that Bank of America will not be the only institution forced to buy back billions of dollars’ worth of loans because it did not meet the lending standards promised to buyers. Costs associated with foreclosure improprieties that have come to light in courts across the country — robo-signers, forged legal documents — are also likely to be substantial.