Fed Releases Regional Economic Stats

(from April 22, 2008)

The so called Beige Book report of regional economic statistics was released by the Fed to reflect the overall economic health of the 12 Districts of the Federal Reserve, seemingly taking the "economic temperature" of the nation since the month of February. The news appears to support a weakening economy in 75% of the districts as housing starts have fallen to a 17-year low and foreclosure filings climbed 57%. The news on property values is also bleak as prices have fallen in many areas of the country and could be down by as much as 10% in some locations as the supply of homes for sale continues to outpace demand. Tightened lending guidelines, coupled with the declining credit quality of many loan applicants, means the pool of qualified buyers will continue to shrink dramatically. Overall consumer spending, the linchpin of economic activity in the U.S., has declined in response to the housing crisis as retailers nationwide have begun reporting slow to declining sales, in areas beyond that of the automotive industry, in over 80% of the districts.

The unemployment rate is 5.1% while the consumer price index (CPI) rose 4.00% with the core rate, which excludes food and energy, rising 2.4%. However anemic growth had been reported by the end of 2007, as overall growth had slowed from the brisk pace in the 3^rd quarter of 4.9% down to 0.6% by the 4^th quarter as both consumption as well as business spending had slowed decidedly. In response, the Fed has exercised a policy of monetary easing as they have brought the Fed Funds rate down to 2.25% from 4.25% and will be expected to cut another .25% from the rate at the next FOMC meeting on April 29^th-30^th.

Existing Home Sales Decline Again

Existing home sales dropped in March, yet another sign of a housing market spiraling downward and dragging the greater economy with it.

The 2 percent drop was the seventh decrease in eight months, according to the National Association of Realtors. The median price of a home also decreased to $200,700, a 7.7 percent drop from last year and the seventh consecutive year-over-year price drop.

In addition, the National Association of Realtors revealed a survey showing 18 percent of homes up for sale in March had negative equity. These homes, where the mortgage was larger than the value of the home, are either in foreclosure or in "short sale." In comparison, from 2002-2006 this amount of negative equity stayed around 3 percent.

Sales are falling as a result of increasing loan restrictions on the one hand, and the prospect of further price declines on the other. Defaults on subprime mortgage loans have led banks to tighten credit and borrowing rules, resulting in less people able to get mortgage loans. For those borrowers who can obtain loans, home values continue to decrease and savvy buyers are waiting until prices hit bottom.

The inventory of homes on the market keeps rising, causing prices to continue to drop. Unsold homes increased 1 percent in March to 4.06 million homes, representing a 9.9-month supply at the current sales pace. Rising foreclosures are pushing more homes on the market.

Existing-home sales make up around 85 percent of the U.S. housing market, and new-home sales make up the rest. Figures from the Commerce Department are expected later this week on sales of new homes, and a 13-year low is predicted. Decreasing overall sales are encouraging builders to stop construction and/or reduce prices. The amount of new homes initiated in March, 947,000, was the lowest in 17 years.

Different areas of the country are experiencing the drop in home sales differently. For March, sales were down 6.5 percent in the Midwest and 3.5 percent in the South, but they increased by 2.2 percent in both the Northeast and the West.

Washington Post Article: Existing home sales fall in March

Economic Reports Profile Sputtering Economy

Reports released today confirm much of the bad news we've been hearing about the economy.

According to the "beige book," a combination of anecdotal reports prepared by the Federal Reserve that chronicle business conditions from around the U.S., the economy is slowing, the homebuilding sector is tanking, and prices are rising to painful levels.

The residential real estate and construction industry are "anemic," according to the book. The Commerce Department provided more specifics this week on this sector of the economy, nothing that builders started 11.9 percent fewer units of housing in March than in February, a huge decline. Permits for single-family homes are down 63 percent from the 2006 peak. Both numbers together indicate a picture of significantly reduced building activity. But this could actually be a good thing. The backlog of houses available for sale, an astounding surplus nationwide, combined with less construction, could actually help reset the balance of supply and demand, and prod the economy back in shape.

Consumer spending is softening, said the beige book. Plus, prices are rising. Consumer prices were up 0.3 percent in March, according to the Labor Department. Rising prices are due to increases across the board, but are driven particularly by natural gas and heating oil. Food prices are also increasing. In March, food prices rose 1.2 percent from big price jumps in vegetables and beef and the biggest increase in rice prices in more than five years.

Producer prices are also spiking, but so far businesses have kept the majority of price increases away from the consumers. The producer price index rose 1.1 percent last month, the largest increase since November (which experienced the highest one-month increase in 33 years) Over the last year, producer prices for finished goods are up 6.9 percent, the biggest year-over-year increase in nearly two years.

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Since increased producer prices are not affecting the majority of consumer products yet, core inflation (price increases of goods other than food and energy) is still at manageable levels for the Federal Reserve. But the forecast for the immediate future is uncertain.

Washington Post Article:

Fed: Economy Worse Off Than Believed

Producer Prices Rise 1.1% in March; Food Up More Than Expected

World's Central Bankers Address Credit Crisis at G-7 Meeting

Heads of Finance from Canada, France, Germany, Italy, Japan, the United Kingdom and the Unites States all met this week in Washington. The meeting came a day after Europe's Central Bank President issued a warning that the crisis in the financial markets may develop into a broader economic dilemma. But the so called G-7 finance ministers found little common ground upon which they could agree in dealing with the crisis as each country maintains differing viewpoints on the level of responsiveness required to combat the problem. Discussions involving strengthening the regulatory environment in which the financial industry operates failed to address the pressing need to mitigate the current market crisis. While implementing more stringent regulations would certainly help prevent the recurrence of a similar crisis again in the future, agreement must be reached now to minimize the damage from the existing crisis before re-focusing on the future.

Unfortunately a joint, coordinated level of cooperation appears unlikely as each of the G-7 nations is facing different economic problems and a one size fits all approach will not work. In the United States, the economy is slowing rapidly and the threat of recession is looming, while in Europe inflation seems to be the overriding concern as they are facing the worst rate of inflation in over 15 years. Given this backdrop, it is unlikely that coordinated monetary and fiscal policies could be effectively applied. However looking toward the future, agreement could be reached on issues of improving the level of multi-national cooperation in both monitoring and regulating the financial markets. Agreement may also be reached in implementing new levels of financial transparency along with the disclosure of losses and raising the over all capital requirements. Steps which could be taken jointly now by the central banks, include lending to foreign banks as well as following the path of the U.S. Fed in lending shorter term government securities and acquiring mortgage-backed assets. ERATE is an excellent source to find the lowest mortgage rates in your state for nearly all loan programs.

Expansion of FHASecure Program Proposed

With over 8.5 million homeowners having virtually little to no equity in their homes, fears of mounting foreclosures continue to grow. In response to the problem, the White House has proposed expanding a program which has been in place since August of 2007 to help stem the tide. This existing Federal Housing Administration (FHA) program makes it possible for many low to moderate income borrowers to refinance into government-insured mortgages, resulting in more manageable monthly payments and helping almost 100,000 homeowners by expanding the role of FHA in dealing with the nationwide credit and housing crisis. FHA loans are insured by the federal government in cases of default though the mortgages themselves are made by private mortgage lenders such commercial banks and mortgage bankers, then after the loans have funded, they are bundled, packaged and sold as mortgage-backed securities known as Ginnie Mae's.

The program, called FHASecure, was established last year to help homeowners in distress who had some equity remaining in their home and had been able to make their mortgage payment but would face a substantial rate increase in the process of refinancing into a government insured fixed rate mortgage. Therefore the program was geared to help borrowers who were stuck in adjustable rate loans (ARMs) and were able to meet their payment obligation up until the point that their interest rate reset higher. About 150,000 homeowners have been able to refinance under FHASecure and the program is projected to reach an additional 400,000 by year's end. Under the new expanded rules proposed, a borrower would be eligible for a refinanced FHA loan even if they were delinquent in making several mortgage payments. With home prices on the decline now in many areas of the country, concessions would be required by both lenders and investors of mortgage-backed securities, because without a reduction in the principal balance owed on the mortgage, a borrower would be left in the position of having to come up with 3% equity in order to refinance. Naturally for an already financially stressed and cash strapped borrower this is not feasible and refinancing is not possible with out agreement by all parties on a reduction of the principal balance. It appears to be the judgment of the Bush Administration that it is the lender and the investor who should bear the responsibility for doing this rather than asking the U.S. taxpayer to assume the burden. Excellent source to find your lowest mortgage rates.

Senate Passes Contentious Housing Package; Bush Offers Own Plan

A bipartisan package offering assistance to businesses and homeowners hurt by the housing crisis passed the Senate today with an impressive 84-12 vote.

The plan includes large tax breaks for homebuilders, a $7,000 tax credit for buyers of foreclosed properties, and $4 billion in grants to buy and improve abandoned homes. The bill also includes $150 billion in pre-foreclosure counseling and stronger loan disclosure requirements. Finally, it includes $10 billion in tax-free mortgage revenue bonds to help homeowners refinance subprime loans.

Despite the show of support, the bill has many detractors including the House and the Bush Administration. Opponents claim the package is biased in favor of businesses instead of homeowners and bails out lenders with taxpayer money. They contend the tax credit for the purchase of foreclosed homes will unfairly reward purchases happening anyway, give banks an incentive for foreclosure, and depress home values. The House will likely reject key points in the package.

Another key sticking point seems to be the $25 billion tax break offered to homebuilders and other businesses experiencing heavy losses. The tax break was dropped from an earlier bill after criticism, but was added to this package after increasing worries among the public and policymakers about the housing crisis.
The Bush administration offered its own proposal on Wednesday. This narrower plan aims to rescue 100,000 homeowners at risk of foreclosure with relaxed government-backed loans standards and increased loan forgiveness.

Subprime borrowers who have missed two or three mortgage payments will be eligible for assistance from the Federal Housing Administration. More specifically, borrowers who have missed two payments and have at least 3 percent equity, and those who have missed three payments with 10 percent equity, would be eligible. Lenders will be encouraged to forgive portions of some loans and enable refinancing.

The plan drew immediate criticism from consumer groups, who said the small measures would do little to help homeowners with no equity and the millions of homeowners facing resetting loans and foreclosure.

Washington Post Article:
Scant Support for Senate Housing Bill

White House Presents Plan To Aid Subprime Borrowers

Bernanke Talks Recession; Groups Oppose Treasury Plan

Confirming what many in the industry and throughout the country already believe, Federal Reserve Chairman Ben Bernanke suggested this week that the U.S. might be in a recession.

In comments to the congressional Joint Economic Committee, Bernanke projected the economy could shrink and contract during the first half of this year. He couched his first use of the term "recession" with optimism, saying he expects growth in the second half of the year, and thinks 2009 will be solid on the basis of the recent interest rate cuts and the fiscal stimulus package.

Bernanke outlined the issues that contribute to his assessment of recession, including a stagnant unemployment rate, decelerating consumer spending, tighter credit, and reduction in business prospects and spending.

Analysts believed the Fed Chair's comments explained some of the unprecedented actions in recent weeks, including continuing interest rate cuts and an intervention to save Bear Stearns from bankruptcy. Bernanke claimed the move to help the Wall Street company is a direct motion to preserve credit and financial solvency for the country.

Bernanke's comments came as opposition grows to the Treasury plan to overhaul the nation's financial regulatory structure in attempts to streamline government response to such crises in the future.

The plan, released this week by Treasury Secretary Henry M. Paulson Jr., offers up a wholly revamped system of regulation in the coming decade, correcting the oversight mistakes that led to today's current crisis. The Treasury hopes to create three more powerful agencies to monitor and oversee banking, market stability, and consumer and investor protection in mortgage lending and other activities. Another goal is to ease the approval process from the Securities and Exchange Commission for mortgage-backed bonds, so oversight is more complete. Eventually the SEC would merge with the Commodity Futures Trading Commission. Finally, the plan also grows the role of the Treasury into chief regulator of financial markets.

The mounting opposition (from lobbyists and members of the Bush administration) contends the plan is too widespread, shutting down longtime financial institutions. Banks could have less choice among regulators and credit unions could be placed under new, business-killing regulations. The SEC and CFTC are crying foul about their major overhauls. Finally, many opponents are questioning the wisdom of centralizing regulation into the Treasury, and the benefits of it for the greater economy.

Washington Post Article:
It Might Be a Recession, Fed Chief Tells Congress?
Opposition To Treasury's Blueprint Gains Steam

Insurance Losses Due to Sub-prime Top Those of Natural Disasters

Insurers are now faced with the prospect of having to hold onto mortgage-backed securities in a market where buyers for such investments have all but disappeared. Without buyers it is difficult if not impossible to establish value and on that basis a ripple effect throughout the entire organization occurs without hope of a turnaround. There is much doubt as to whether significant portions of mortgage-backed debt will ever reach maturity unscathed. The continually unfolding developments resulting from the mortgage meltdown are forecast by many within the industry to ultimately produce a bigger hit to insurers than any of the previous natural disasters. Losses resulting from mortgage-backed securities continue to be revised upward from all initial estimates with no end in sight. And for the first time since the late 1990's the book value of 24 companies within the KBW Insurance Index actually declined.

Total industry losses currently exceed $38 billion and that is not where things will likely end. As auditors continue to process the financial standings of the insurers, many are found to have underestimated their losses and incorrectly valued their holdings. Many portfolio managers are now being advised to carefully weigh the credit quality of all that is purchased to insure each acquisition can safely be held to maturity. Markdowns on many of the now defunct mortgage-backed assets will continue to occur as the assets supporting them, namely home values, continue to decline. It is difficult to project when a bottom will be reached and the course reversed as many insurers may continue with write downs resulting in losses spanning the next five years.