Mortgage Pain Hits Prudent Borrowers

Fannie Adds More Fees on Loans -- Even for Home Buyers
With Good Credit; 'Jumbo' Rates Resume Upward Trend
By JAMES R. HAGERTY and RUTH SIMON
December 11, 2007; Page B9

Some of the costs of cleaning up the nation's mortgage crisis are beginning to hit innocent bystanders: people who pay their bills on time and avoid excessive debt.

Fannie Mae, the giant government-sponsored mortgage investor, last week raised costs for many borrowers by quietly adding a 0.25% up-front charge on all new mortgages that it buys or guarantees. On a $400,000 mortgage, that would mean an extra $1,000 in fees, almost certain to be passed on to the consumer. Freddie Mac, the other big government-sponsored mortgage investor, is expected to impose a similar fee soon, according to a person familiar with the situation.

The new charge from Fannie Mae adds to the general gloom over the housing market. It comes as mortgage interest rates are heading up again after a recent dip -- as well as increases in mortgage-insurance costs, tougher requirements on down payments and other moves by lenders to ration credit. And last month, Fannie and Freddie imposed surcharges for mortgage borrowers with lower credit scores.

Loan applications have been so slow lately, says Lou Barnes, a mortgage banker in Boulder, Colo., that it feels like "our client base today is limited to people who don't read the newspaper or watch television."

Still, mortgage loans remain available for many people at rates that are attractive by historical standards. People with good credit scores and enough savings to pay a substantial down payment can still get 30-year fixed-rate mortgages of as much as $417,000 for 6.14% on average, according to HSH Associates, a financial-publishing firm in Pompton Plains, N.J.

But so-called jumbo loans -- those above $417,000, the ceiling on mortgages that can be bought or guaranteed by Fannie and Freddie -- have become much more expensive in relation to smaller mortgages.

The average rate for a fixed-rate jumbo loan is 7.13%, according to HSH. That is down from a recent high of 7.46% but remains lofty in comparison with "conforming" loans, those that can be sold to Fannie or Freddie. The premium paid for jumbo loans ballooned in August, when many loan investors began shunning mortgages lacking a guarantee from Fannie or Freddie.

Fannie said its new 0.25% fee will apply to loans sold by lenders to Fannie or placed into pools of guaranteed loans backing mortgage securities as of March 1, 2008. Lenders are likely to start adding that fee over the next few weeks because there is often a delay of several months between loan terms being offered to consumers and the sale of a completed loan to Fannie.

In a statement, Fannie said the new fee is needed "to ensure that what we charge aligns with the risk we bear." The National Association of Home Builders labeled the fee "a broad tax on homeownership." More than 40% of all mortgages outstanding are owned or guaranteed by Fannie or Freddie.

The fee is the latest in a series of moves by Fannie and Freddie that raise the cost of credit for some borrowers. Late last month, they imposed surcharges that affect mortgage borrowers who have credit scores below 680, on a standard scale of 300 to 850, and who are borrowing more than 70% of a property's value. For example, someone with a credit score of 650 would pay a surcharge of 1.25% of the loan amount for a mortgage to be sold to Fannie. On a $300,000 loan, that would mean extra fees of $3,750. The fee could be paid in cash or in the form of a higher interest rate than would normally apply.

SPREADING FALLOUT

The mortgage crisis has begun pinching even borrowers with good credit ratings. Here's what is happening:

• Fannie Mae has imposed an extra charge on all new loans it buys or guarantees.

• Mortgage insurers have raised premiums for certain borrowers and tightened standards.

• Borrowers with good credit scores and equity in their homes can still get attractive rates from lenders.Fannie also is raising down-payment requirements for loans it purchases or guarantees in places where house prices are falling, which by some measures is most of the country. In these declining markets, lenders will need to cut by five percentage points the maximum percentage of the home's estimated value that can be financed. For instance, for types of loans that Fannie normally would allow to cover up to 100% of the estimated value, the ceiling now is 95% in declining markets.

Standards continue to tighten in other areas. Lenders that make the largest loans and offer the best rates to borrowers seeking jumbo mortgages want borrowers to show not only a good credit score but also enough reserves to cover as much as three years of mortgage payments and carrying costs, says Melissa Cohn, a mortgage broker in New York. Borrowers taking out interest-only loans are being qualified based on their ability to make the full payment once the interest-only period ends and not just the lower initial payment, she says.

Lenders in recent months have sharply scaled back on loans that don't require the borrower to make a down payment or provide proof of income and savings. The bar for credit scores is rising, too. "Historically, lenders would consider top-tier credit [a score of] 680," says David Soleymani, a mortgage broker in Los Angeles. "Now, many of those lenders want to see a 720," but are rewarding such borrowers with better rates, he says.

Mortgage insurers are also raising their prices and tightening their standards. Mortgage insurance is typically required when a borrower finances more than 80% of a home's value. During the peak of the housing boom, many borrowers got around this requirement by taking out a so-called piggyback mortgage, which combined a mortgage with a home-equity loan or line of credit. But demand for mortgage insurance has climbed as most lenders have stopped promoting piggyback loans.

Triad Guaranty Insurance Corp., Winston-Salem, N.C., this month stopped providing mortgage insurance on option adjustable-rate mortgages, which carry low introductory rates but can lead to a rising loan balance. Triad also said it would no longer provide mortgage insurance for loans that exceed 97% of a home's value. It set a 90% threshold for loans in four states where home prices have been dropping fast: Arizona, California, Florida and Nevada. "We want to look for people who have more equity rather than less equity" in their homes, says Triad Vice President Jerry Schwartz.

PMI Group Inc., a Walnut Creek, Calif., mortgage insurer, this fall stopped writing mortgage insurance for borrowers with credit scores below 620 who are financing more than 95% of their home's value. PMI also has boosted prices for most borrowers who have credit scores of 620 and higher with loan-to-value ratios above 95%. Borrowers with credit scores between 620 and 659 who are financing more than 97% of their home's value face the biggest increase. The monthly premium for a $200,000 mortgage will increase by $123 to $283.

Starting next month, MGIC Investment Corp. will no longer insure loans when income and assets aren't fully documented unless borrowers can show they are self-employed and are either buying a home they intend to live in or are refinancing the mortgage on their home without pulling cash out. MGIC also will no longer insure loans in California and Florida where the borrower has less than 5% equity and is raising premiums for certain borrowers. "This is the first significant price change since the mid-1980s," says Michael Zimmerman, MGIC's vice president of investor relations.

With standards tightening, some borrowers who might previously have looked for a subprime mortgage or 100% financing are turning to loans guaranteed by the Federal Housing Administration, which for a fee insures mortgages as much as $362,790. Peter Lansing, a mortgage banker in Denver, says that FHA loans accounted for more than half of his business last month, compared with less than 10% a year ago.

Write to James R. Hagerty at bob.hagerty@wsj.com and Ruth Simon at ruth.simon@wsj.com

Economy Calls for a Big Rate Cut

Newsmax.com

I have just returned from a week talking with bankers in England and in Switzerland.

In Basel, I had an illuminating — but “off-the-record” — interview with the Bank of International Settlements (BIS), the important research and coordination working body for the world’s Central Bankers.

Although the initial positions presented by those whom I visited were to some degree less bearish than my own, I have to say that their confidential, final views began to approach my own, albeit they were seasoned with a hope that things would not unwind so drastically.

In summary, I picked up a certain sense of quiet pessimism, more in line with my own views.

Now back home in the United States, I saw The Wall Street Journal front page headline, “U.S. Mortgage Crisis Rivals S&L Meltdown.”

As The Wall Street Journal article points out, there have been five major debt crises since World War II.

They started in 1982 with the bank lending crisis, of which I warned in a speech in the House of Commons in 1980. It amounted to $55 billion, or 1.7 percent of gross domestic product (GDP).

This was followed by the Savings and Loan crisis. That amounted to $189 billion, or 3.2 percent of the then-GDP, but ominously lasted almost nine years, from 1986 to 1995.

The Japanese bank-lending crisis totaled $263 billion, or 7 percent of GDP, and lasted 11 years, from 1992 to 2003. It is most important to realize that Japan has still not yet recovered from the subsequent economic slump, triggered by a revaluation of its currency.

In 2000 to 2003, we experienced what became known as the dot-com bust. It was only $93 billion, a tiny 0.9 percent of GDP, but nevertheless a painful memory for many investors.

Today, the subprime mortgage crisis is estimated to be some $150 to $400 billion. That makes it 1 to 3 percent of GDP.

However, unlike the previous bank crises, our present subprime crisis is still running and looking worse by the day.

Indeed, only today, UBS – the largest money manager in the world – announced a second hit, this time for $10 billion.

This despite the fact that UBS has obtained a cash infusion. Pretty soon you’re talking real money, even for a major Swiss bank.

Today, Bank of America said it is closing its $12 billion money market fund because of losses in structured investment vehicles (SIVs)! Investors will receive less than par — from a money market!

When I warned our readers to be wary of money market funds that had invested in SIVs, some readers thought I was being unnecessarily alarmist. I was merely trying to warn our readers.

Looking at The Wall Street Journal article, I am struck not by the relatively small percentage of comparative GDP but by both the absolute size and complexity of the “toxic waste” within the subprime crisis and by the fact that it is both worldwide and held by unrelated investors, including Norwegian townships within the Arctic Circle!

This is causing a very dangerous credit crisis, affecting all but the most prime borrowers.

In addition, the size of our present problem, estimated at $150 to 400 billion, is still growing.

I believe that President Bush’s idea to freeze certain qualifying ARM re-sets is not an order but merely a suggestion! I fear that it will not work and that, by the time our subprime crisis is over, it will be recorded to have been well over the highest estimate of 3 percent of GDP.

In short I see daily, growing evidence that we are entering a recession. Those who disagree are growing increasingly desperate in their efforts to drown out that view and deny the opportunity to express it.

Not that I am the only economist to believe we are fast entering a recession. Far from it — at least for now!

But, by denying the free expression of opinion, our government risks making decision based upon false assumptions.

For instance, the Fed is due to make a crucial interest rate decision Tuesday.

The general expectation is for a quarter to a half-point cut. Indeed, the recent headline inflation number — without looking at the continued decline of manufacturing and construction jobs, inside the figures — may well give our Fed the excuse to lower rates by only a quarter of a point.

Here it is interesting to note that last week, both the British and the Canadians dropped their rates by a quarter-point. Sadly and despite calls from grass roots, the European Central Bank kept its Euro rate on hold.

I have often said that, depending upon the phase of the economic cycle and the shape and level of the yield curve, it can take between nine and 24 months for a Fed rate change to gain economic traction.

To divert our pending economic recession from morphing into a severe recession or worse will require a Fed interest rate cut to 1 percent or less. In saying this, I agree with bond fund manager Bill Gross of Pimco.

Even a half-point rate cut tomorrow will prove to be far too little and too late to meet the hopes of my friends the English and Swiss bankers, that a catastrophy will be avoided.

If the Fed does cut its key rates by half a point tomorrow, stock markets can be expected to rise. It will be a false dawn.

Beware of more 'hidden' subprime losses

HERB GREENBERG
Commentary: Report says Washington Mutual, Countrywide most vulnerable
By Herb Greenberg, MarketWatch
Last update: 8:10 p.m. EST Dec. 9, 2007Print E-mail RSS Disable Live Quotes

This column first was published in the weekend edition of The Wall Street Journal.

SAN DIEGO (MarketWatch) -- The reality of Generally Accepted Accounting Principles, or GAAP, is that they give companies just enough rope to hang themselves and their investors, if they so please. Much of GAAP is so subjective that you could drive side-by-side snow plows through the gray areas.

That is something to keep in mind if, with the latest wave of write-offs, you believe it is time to start bargain hunting among the most beaten-down financial-services companies tied to the mortgage blowup. The time may very well be right, but a recent report by Gradient Analytics warns that financial-reporting practices of some of these companies yesterday and today could still come back to bite investors tomorrow.

Gradient, a Scottsdale, Ariz., research firm that caters to mutual funds and hedge funds, was early to spot accounting issues at Krispy Kreme Doughnuts Inc. among others, and their stocks subsequently tumbled.

"I think for a number of years they played games," Donn Vickrey, a former accounting professor who co-founded and is now editor-in-chief of Gradient, says about the financial-services companies.

By "playing games" he means a tendency during the mortgage boom "to report numbers that were artificially high." There were a variety of ways to do that, all of them completely legitimate and blessed by the gods of financial accounting rules otherwise known as the Financial Accounting Standards Board.

One of the most-popular tactics was front-loading income and cash flows through what is known as "gain on sale" accounting, as loans were packaged and sold to other investors. The amount recognized largely reflected what the company expects to receive at some point in the future, based on predictions of such things as delinquencies, prepayments and interest rates. It is totally discretionary; the more conservative the predictions, the lower the gain.

Just as companies may have been reporting numbers that were too high, Vickrey believes some might now be reporting losses and charges that are artificially low, hoping they will somehow get bailed out before the situation worsens.

This is being done, he believes, by such things as deferring recognition of losses; transferring mortgages that are likely to default from one part of the balance sheet to another, where management has more discretion in determining the seriousness of the loss; somehow concealing "the aftereffects" of aggressive gain-on-sale accounting, and reliance on interest income from negatively amortized mortgages those in which the amount owed rises if payments don't cover all the interest due, which in this environment at best appears dicey.

Much of this, he says, involves meeting "the bare minimum letter of GAAP, but not adhering to the spirit of GAAP."

Among the five biggest companies involved in mortgage securities, Gradient believes Washington Mutual Inc. have been the most aggressive, with Washington Mutual edging out Countrywide as having "the most risk for a material misstatement." Washington Mutual didn't respond to requests for comment.

Countrywide said its accounting is appropriate and it has taken steps to reduce risk.

Gradient warns that Washington Mutual may not be properly valuing loans it is holding for investment purposes. As a result, reserves for future losses may be too low.

While the company boosted its loss provision in the third quarter, the Gradient report says "the increase appears to be too little too late as the allowance for loan losses has failed to keep pace with the increase in nonperforming loans."

Meanwhile, in recent years, interest from negatively amortized mortgages leapt as a percentage of interest income to 7.2% for the first nine months of this year from 1.8% in the same period two years ago. Not only is that income unsustainable, Gradient says, but more prone to write-offs, especially if there are increased delinquencies and defaults.

Then there's the high level of gain-on-sale income in prior years "that may signal additional risks to come."

Washington Mutual, the report says, ranked second behind only Countrywide in terms of its reliance on gain-on-sale. Countrywide has been on Gradient's screen for four years because of a variety of earnings-quality issues.

As with Washington Mutual, Gradient now wonders whether there could be "hidden losses" among loans held by Countrywide for investment. While reserves as a percentage of nonperforming loans have been rising, hitting 63.4% as of Sept. 30, Gradient says they still lag behind peers, including Washington Mutual. Countrywide disagrees, and says that "when all of the relevant factors are considered, our 'reserves' are comparable to our competitors."

Like Washington Mutual, Gradient says Countrywide suffers from "low quality income" related to negative-amortized loans. "Unfortunately," the report says, in trying to determine its exposure, "Countrywide does not provide as much detail as other firms we surveyed."

While the stocks of these companies and others have fallen considerably, Vickrey believes "a lot remains to be revealed." Can't wait.

Herb Greenberg is senior columnist for MarketWatch and contributor to CNBC television based in San Diego.

U.S. Mortgage Delinquencies Rise to 20-Year High (Update1)

By Kathleen M. Howley

Dec. 6 (Bloomberg) -- The number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter as borrowers were unable to refinance or sell their homes.

The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 percent, the highest since 1986, the Mortgage Bankers Association said in a report today. New foreclosures hit an all-time high for a second consecutive quarter.

The surge in foreclosures is expanding the inventory of unsold homes and contributing to the decline in home prices. The National Association of Realtors is forecasting new home sales will drop 13 percent in 2008. About 40 percent of lenders have increased their standards for the most creditworthy borrowers to qualify for a so-called prime loan, according to a Federal Reserve study in October.

``These are the first numbers we've seen that combine the meltdown of the credit markets with the drop in home prices,'' said Jay Brinkmann, vice president of research and economics for the Washington-based bankers trade group.

President George W. Bush and U.S. Treasury Secretary Henry Paulson plan to announce a proposal today to freeze some subprime mortgages to stop a wave of foreclosures that has cut prices and demand for houses.

California, Florida Lead

One in every five adjustable-rate subprime loans had late payments in the quarter, a number that excludes the one of every 10 already in foreclosure, the trade group said. Foreclosures started on all types of mortgages rose to an all-time high of 0.78 percent from 0.65 percent.

In the quarter, 3.12 percent of prime borrowers made their mortgage payments at least 30 days late, up from 2.73 percent in the second quarter, the report said. The subprime share of late payments rose to 16.3 percent from 14.8 percent.

The numbers were driven by California, the U.S.'s largest state, and Florida, Brinkmann said. The two states had 36.4 percent of all of the nation's prime adjustable-rate loans and had 42.4 percent of new foreclosures during the quarter, he said. They had 28.1 percent of subprime adjustable mortgages and 33.7 percent of foreclosure starts for that type of loan.

That is more than double the 15 percent who reported boosting requirements in July, the prior survey. Sixty percent of banks said they tightened qualifications for so-called non- traditional mortgages such as interest-only loans, the Fed said.

The Mortgage Bankers report is based on a survey of 45.4 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net .

Last Updated: December 6, 2007 10:31 EST

US property risks

Published: December 2 2007 19:28 | Last updated: December 2 2007 19:28

The subprime residential lending crash has dealt the market a body blow. But its aftershocks could hit lenders with a second real estate-related punch, if the highly leveraged commercial property market succumbs to the contagion.

Banks have significantly tightened their lending standards this year, and commercial real estate has felt the effects particularly quickly. Commercial mortgage-backed security issues, which finance about half of deals and were a key driver of the recent market boom, dropped 84 per cent in October from a record high of $38.5bn in March. At one point, some loans actually exceeded property values. Now, typical loan-to-value ratios have retreated to about 70 per cent – when deals are completed at all.

Lenders have, appropriately, returned to their senses. But some may have changed from partygoer to policeman too late. Tough new standards will not reduce risk on ambitious past financings. US banks could see $11bn to $78bn of commercial real estate losses if the lending crisis spreads, according to Goldman Sachs. Each lender’s risk would depend on its mix of whole loans and CMBS, as well as newer, riskier commercial real estate collateralised debt obligations and even riskier B-note or mezzanine debt. Those more speculative lending markets were bursting at the seams with demand this year. But they have never been tested by a serious downturn.

The commercial property sector is not likely to suffer the huge falls experienced by the worst-hit residential markets – prices are more likely to correct by, say, 10 per cent to 15 per cent. Supply is near its tightest point in decades. And though total US real estate debt has skyrocketed to $14,000bn, commercial leverage has expanded far more slowly than residential debt.

But certain factors facing commercial tenants compound the threat. Store, hotel and factory owners are holding their breath as the economy struggles under the weight of the housing crisis. Even the hot Manhattan office market has seen almost 10,000 Wall Street lay-offs this year. Given banks’ astronomical losses in subprime lending, a modest slide in commercial property values may be the best they can hope for.

Copyright The Financial Times Limited 2007

Housing Slump's Third Year to Be `Deepest' Since WWII (Update1)

By Dan Levy and Brian Louis

Nov. 30 (Bloomberg) -- As the U.S. housing slump enters its third year, there is no sign of dawn in the darkness that is paralyzing home building, home buying and home lending.

Standard & Poor's 15-member Supercomposite Homebuilding Index tumbled 62 percent this year as of yesterday, the largest drop since the benchmark was started in 1995. The companies have lost about $35 billion of market value.

The outlook is bleak with new home sales projected to fall 13 percent in 2008, according to estimates from the National Association of Realtors in Chicago, even as interest rates drop. Losses at Fannie Mae and Freddie Mac, the two biggest U.S. providers of mortgage financing, may restrict the availability of home loans, and chief executive officers at D.R. Horton Inc. and Centex Corp. expect another tough year.

``This looks like it's going to be the deepest correction of any housing correction since World War II, and the question really is, `What's the duration, how long will it be?''' Centex CEO Timothy Eller said at a JPMorgan Chase & Co. conference in Las Vegas on Nov. 27.

The decline in the S&P homebuilding index has pushed the measure to March 2003 levels, with companies including Centex and Pulte Homes Inc. falling more than 65 percent in composite trading on the New York Stock Exchange.

Credit Protection Costs

Total new home sales peaked in July 2005 and have declined for 19 of the last 28 months through October, according to Commerce Department data. Existing home sales peaked in September 2005. The median price for a new home dropped 13 percent in October, the most since 1970, and the annual sales rate for new homes in September was the lowest in almost 12 years.

Bond investors have sought more protection against homebuilders defaulting on debt as revenue and cash flow have declined. Credit protection costs reached 12-month highs in the week ended Nov. 21 for Miami-based Lennar Corp., Bloomfield Hills, Michigan-based Pulte, Dallas-based Centex and Fort Worth, Texas-based D.R. Horton, the four largest U.S. builders by revenue; as well as Calabasas, California-based Ryland Group Inc., a builder in 28 U.S. markets, and Hovnanian Enterprises Inc. of Red Bank, New Jersey, the biggest builder in that state.

`Bankruptcy Risks'

Credit default swap spreads climbed last week by as much as 335 basis points for builders with investment-grade ratings and by an average 209 basis points for those with junk ratings, according to CreditSights Inc., a New York-based research firm. Credit default swaps are contracts to protect bondholders against default. An increase indicates worsening perceptions for credit quality.

``If we talked two weeks ago, I'd say there wasn't much more downside, but the market is acting like there's still a lot more to go,'' said James Wilson, an analyst who follows home builders at San Francisco-based JMP Securities LLC.

Beazer Homes USA Inc., the Atlanta-based homebuilder under investigation by the U.S. Securities and Exchange Commission, and Hovnanian are ``bankruptcy risks,'' Wilson said. Those companies have too much debt and are exposed to slumping housing markets in Florida and Michigan, Indiana and Ohio, he said.

Beazer CEO Ian McCarthy said at this week's conference in Las Vegas that 2008 ``is going to be another tough year.'' The company has a secured credit line of $500 million, he said.

``The company is really looking to make sure its balance sheet and its credit position is strong as we go through this tough time,'' McCarthy said. The company also has agreements ``with our bankers and with our secured credit lenders'' that will ``put us in good stead going forward.''

Worse 2008?

Hovnanian CEO Ara Hovnanian said at the JPMorgan conference that the company has a ``better financial structure than we've ever had.'' Hovnanian's bonds don't start coming due until 2010 and 2012, ``giving us plenty of breathing room,'' he said.

``We're experienced operators, been around for almost 50 years,'' Hovnanian said. ``We will clearly persevere and thrive in the eventual upturn as we have after every cycle.''

Many homebuilding executives at the conference said they expect the slump to last through 2008.

Next year ``is going to be worse than '07 for us and for the industry in general,'' said Donald Tomnitz, D.R. Horton's CEO.

At least three closely held companies filed for bankruptcy protection in the past month, including Fort Lauderdale, Florida-based Levitt and Sons LLC, the 1949 pioneer of planned suburbs with Levittown on New York's Long Island. Tousa Inc. of Hollywood, Florida, which has lost 99 percent of its stock market value this year, said this month it was considering filing for Chapter 11 bankruptcy protection.

Tousa's Strategy

Tousa acquired 22,000 home sites in Florida through a joint venture in August 2005, when the housing market was close to its peak. Florida accounted for five of the top 25 U.S. metropolitan areas with the highest foreclosure rates this year through Sept. 30, according to RealtyTrac Inc. The Irvine, California-based seller of foreclosure data has a database of more than 1 million U.S. properties.

The New York Stock Exchange suspended trading in Tousa on Nov. 19 because the average closing price was less than $1 for 30 straight trading days. Tousa last traded at 8 cents, down from a seven-year high of $30 in August 2005.

Standard Pacific Corp., based in Irvine, California, is the worst performer in the S&P homebuilding index, dropping 89 percent. Home sales in California, the company's largest source of revenue, fell 40 percent and median prices for existing homes slid 9.9 percent in October, data compiled by the California Association of Realtors show.

Housing Glut

A housing rebound is unlikely, as about 1 million adjustable loans made to subprime borrowers, those with weak or incomplete credit histories, are scheduled to reset at a higher rate in 2008, according to RealtyTrac.

That may put many homeowners at risk of foreclosure and lower the value of neighboring houses, said Rick Sharga, vice president of marketing at RealtyTrac. About 1.3 million subprime mortgages will be in foreclosure by September 2009, including actions already under way, according to estimates from New York- based analysts at Credit Suisse Group.

``There is just no quick fix, including further rate cuts, to stabilize the current weakness in the housing market,'' said CreditSights analysts Frank Lee and Sarah Rowin in a Nov. 23 report to clients.

Discounted Prices

Builders must contend with a glut of existing homes on the market. There's an almost 11-month supply of unsold existing homes, the highest in more than eight years, according to data from the National Association of Realtors.

The decline in the market for existing homes is lagging ``far behind'' the new home market, and resale prices have only started to erode, said Citigroup Inc. analyst Stephen Kim in a Nov. 23 report.

``We have never before seen how a belated dropoff in existing home prices will affect already discounted prices for new homes, but it is difficult to be optimistic here,'' Kim wrote.

Citigroup cut its rating on Lennar, Centex, Los Angeles- based KB Home, D.R. Horton, Ryland, Pulte and Standard Pacific to ``hold'' from ``buy.'' Meritage Homes Corp. in Scottsdale, Arizona, was reduced to ``sell'' from ``hold.''

Cash flow will assume even greater importance as homebuilders owe $875 million in debt payments in 2008 and then about $1.6 billion in 2009 and 2010, data compiled by CreditSights show.

`Hard Year'

Potential legal costs also may hurt the builders, said Lee of CreditSights. D.R. Horton, Hovnanian and Reston, Virginia- based NVR Inc. are being sued by consumers who said they were coerced into taking loans from the company's mortgage units. The top 10 builders made $2.1 billion from providing financial services such as mortgages and title insurance last year, according to data compiled by UBS AG.

Investigations of builders may also weigh on the companies. The U.S. Department of Housing and Urban Development is examining whether builders received kickbacks when selling property. Pulte and KB Home are among six homebuilders that agreed last month to pay a total of $1.4 million to settle federal probes into whether they accepted rebates from insurers for referrals when selling homes.

New York, Ohio and at least six other states are investigating the mortgage industry, including whether appraisers, mortgage brokers and lenders may have inflated home values. Resolving the complaints ``could run into the millions or billions'' of dollars, CreditSights's Lee said.

``There will be some bankruptcies, some consolidations, some private equity plays,'' said Kenneth Rosen, chairman of the University of California's Fisher School of Real Estate and Urban Economics in Berkeley. ``It's going to be another hard year.''

U.S. Economy: Confidence Drops More Than Predicted (Update2)

By Shobhana Chandra and Bob Willis

Nov. 27 (Bloomberg) -- Consumer confidence fell more than forecast in November as Americans struggled with surging fuel costs and falling home prices.

The Conference Board's confidence index decreased to 87.3, the lowest level since the aftermath of Hurricane Katrina in 2005, the New York-based group said today. House values dropped 4.5 percent in the third quarter from a year earlier, the most since records began in 1988, S&P/Case-Shiller reported separately today.

The gloomier mood increases the likelihood that holiday sales, which account for a fifth of retailers' yearly revenue, will be disappointing. Federal Reserve policy makers and private economists have cut growth forecasts as the housing slump enters its third year and jeopardizes consumer spending.

``This is a strong indication that consumers are going to pull back sharply and growth is going to be very weak,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The message to the Fed should be that they need to keep cutting rates.''

October's confidence reading was revised down to 95.2, from a previously reported 95.6. None of the 67 economists surveyed by Bloomberg News predicted the size of the decline. The median forecast was 91.

Stocks Jump

Treasury securities remained lower and stock prices rose following the reports as investors focused on news that Citigroup Inc. will receive a cash infusion from Abu Dhabi's government. The Dow Jones Industrial Average was up 124 points, or 1 percent, at 2:59 p.m. in New York.

Property prices may keep sliding in coming months as slowing sales and rising foreclosures aggravate the glut of unsold homes, economists said.

The housing recession will drive down property values by $1.2 trillion next year and slash tax revenue by more than $6.6 billion, according to a report issued today by the U.S. Conference of Mayors. The 361 largest U.S. cities will experience a combined loss of $166 billion in economic growth, led by $10.4 billion in the New York-Northern New Jersey area, according to the study.

``We do have an immediate crisis,'' Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, said in an interview. ``It might push this country into recession.''

Other Reports

Lower property values make it harder for owners to tap home equity, while gasoline at more than $3 a gallon and higher home- heating bills also sour Americans' mood. A report last week showed the Reuters/University of Michigan sentiment index fell this month to a two-year low.

Compared with other sentiment gauges, the Conference Board's index tends to be more influenced by attitudes about the state of the labor market, economists said.

An average of 330,000 workers filed first-time claims for jobless benefits per week in November, up from 306,000 as recently as July. The increase suggests firings are mounting as businesses try to cut costs.

Fed policy makers are counting on wage gains to help Americans maintain spending, according to the minutes of their Oct. 31 meeting. Still, there was a risk falling home prices could ``further sap consumer confidence.''

Expectations Slump

The Conference Board's measure of present conditions fell to 115.4 from 118 the prior month. The gauge of expectations for the next six months decreased to 68.7, the lowest since March 2003, from 80.

Today's report showed the share of consumers who said jobs are plentiful retreated to 23.2 percent in November from 24.1 percent the prior month. The proportion of people who said jobs are hard to get also decreased to 21.3 percent from 22.8 percent.

The proportion of people who expect their incomes to rise over the next six months dropped to 18.7 percent from 19.9 percent. The share expecting more jobs decreased to 10.8 percent from 13.3 percent.

The number of people planning to buy a home or an automobile within the next six months fell.

``The heating bills are a big worry, but behind that is also the worry that jobs might be in jeopardy,'' Kenneth Goldstein, a Conference Board economist, said in an interview.

Retail Profits

Retailers are bracing for a slowdown through the holidays and into 2008. Target Corp., the second-biggest U.S. discounter, last week reported its first profit decline in two years, and said it expects slowing sales growth through the first quarter.

The National Retail Federation this week maintained its forecast that combined sales for November and December will show the smallest increase in five years even after purchases were stronger than forecast after the Thanksgiving holiday. Americans spent less per person even as more went shopping, the group said.

``Elevated energy costs and the anticipation of further increases continues to impact Americans' ability to spend on discretionary projects,'' Robert Niblock, chief executive officer of Lowe's Cos., the second-largest home improvement retailer, said on a conference call last week. ``Access to mortgage financing is a concern we'll continue to watch.''

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: November 27, 2007 15:01 EST

S&P: 3Q Home Prices Fall by 4.5 Percent

By J.W. Elphinstone, AP Business Writer
Tuesday November 27, 9:52 am ET

NEW YORK (AP) -- U.S. home prices fell 4.5 percent in the third quarter from a year earlier, the sharpest drop since Standard & Poor's began its nationwide housing index in 1987 and another sign that the housing slump is far from over, the research group said Tuesday .

The index also showed that prices fell 1.7 percent from the previous three-month period, the largest quarter-to-quarter decline in the index's history.

The S&P/Case-Schiller quarterly index tracks prices of existing single-family homes across the nation compared with a year earlier.

A separate index that covers 20 U.S. metropolitan areas dropped 4.9 percent in September from a year earlier, with 15 metro areas posting declines. Only five metro areas -- Atlanta, Charlotte, N.C., Dallas, Portland, Ore., and Seattle -- showed an increase in prices, but S&P noted that the pace of the rise is decelerating.

Tampa and Miami led the index with the lowest year-over-year declines at 11.1 percent and 10 percent, respectively. It also showed drops in San Diego of 9.6 percent; Detroit, 9.6 percent; Las Vegas, 9 percent; Phoenix, 8.8 percent; and Los Angeles, 7 percent.

The S&P's 10-area index decreased 5.5 percent in September from the previous year.

Last week, the National Association of Realtors said that sales of existing homes fell in 46 states in the third quarter. However, the trade group said home prices rose in 93 of the 150 metropolitan areas surveyed.

Home Sales May Drop, Durable Orders Stall: U.S. Economy Preview

By Shobhana Chandra

Nov. 25 (Bloomberg) -- U.S. home sales fell in October to the lowest in at least eight years and business spending stalled as the real-estate slump rippled through the economy, economists said before reports this week.

Total purchases of new and existing homes fell 1 percent to an annual pace of 5.75 million, according to the median estimate of economists surveyed by Bloomberg News. Orders for long- lasting goods were little changed following the biggest back-to- back declines in at least 15 years, a separate report may show.

The housing recession will persist into 2008 as banks tighten lending rules, foreclosures rise and prospective buyers wait for further price declines, economists said. Business and consumer spending are likely to cool this quarter, leading to a deceleration in growth.

``The reports could paint a soft picture at the start of the fourth quarter,'' said Jonathan Basile, an economist at Credit Suisse Holdings Inc. in New York. ``The fundamentals in the housing sector are still weak with regards to demand and supply. On the manufacturing side, things aren't overly optimistic either.''

The National Association of Realtors is scheduled to report sales of existing homes on Nov. 28. Economists in the survey estimate that resales fell to a 5 million annual rate last month, the lowest level since comparable records began in 1999.

New-home sales, due from the Commerce Department a day later, slipped to a 750,000 pace, according to the survey median. Purchases were at an 11-year low 735,000 rate in August.

Existing-home sales account for about 85 percent of the market, and purchases of new homes make up the rest.

Timelier Gauge

New-home purchases are considered a timelier indicator because they are based on contract signings, while existing home sales are calculated when a contract closes, usually a month or two later.

D.R. Horton Inc., the second-largest U.S. homebuilder, on Nov. 20 reported a fiscal fourth-quarter loss and its worst annual results in at least a decade.

Next year will be ``more difficult'' than 2007, Donald Tomnitz, chief executive officer of D.R. Horton, said on a conference call. ``There's less volume, and the volume that is there is demanding better pricing.''

Home prices in 20 metropolitan areas probably dropped 5 percent in the 12 months to September, the most since record keeping began in 2001, a report from Standard & Poor's/Case- Shiller Nov. 27 is forecast to show.

Consumer Headwinds

Falling property values combined with rising fuel costs and reduced access to credit suggest consumer spending, which accounts for more than two-thirds of the economy, will slow.

Commerce Department figures due Nov. 30 may show spending grew 0.3 percent in October for a second month, according the survey median. Spending adjusted for inflation, the gauge used to calculate economic growth, was probably little changed, economists said.

Bank of America Corp. and JPMorgan Chase & Co. are among banks that have lowered growth forecasts in recent weeks, in part because of a projected slowdown in consumer spending. The economy is likely to grow at less than a 1 percent annual pace this quarter and next, according to economists at Bank of America.

Such an outcome would mark a sharp slowdown from the previous three months. Revised figures from the Commerce Department on Nov. 29 are forecast to show that gross domestic product rose at an annual rate of 4.9 percent from July through September, a percentage point more than the government estimated last month and the most in four years.

Work Off Inventories

A bigger jump in inventories than previously estimated will contribute to the revision, economists said. The need to work off some of those stockpiles this quarter will have a hand in the projected growth deceleration.

The Nov. 28 Commerce Department report on orders for durable goods, those made to last at least several years, may show that business investment in new equipment has also slackened, economists said.

Federal Reserve policy makers reduced their growth forecasts when they last met on Oct. 31, according to meeting minutes released last week. Central bankers projected the economy would grow between 1.8 percent and 2.5 percent in 2008, ``notably below'' their last forecast issued in July, the minutes said.

Investors almost universally expect strains in financial markets and the slowdown in growth will cause the Fed to again lower the target on the benchmark interest rate when policy makers next meet on Dec. 11.



Bloomberg Survey

Date Time Period Indicator BN Survey
Prior
11/27 10:00 Nov. Confidence-Conf. Board 91.0 95.6
11/28 8:30 Oct. Durable Goods Orders 0.0% -1.7%
11/28 10:00 Oct. Home Resales 5.00M 5.04M
11/29 8:30 3Q P GDP Price Index 0.8% 0.8%
11/29 8:30 3Q P Gross Domestic Product 4.9% 3.9%
11/29 8:30 11/24 Initial Jobless Claims 330K 330K
11/29 8:30 11/17 Continuing Claims 2575K 2566K
11/29 10:00 Oct. New Home Sales 750,000 770,000
11/30 8:30 Oct. Personal Income 0.4% 0.4%
11/30 8:30 Oct. Personal Spending 0.3% 0.3%
11/30 10:00 Nov. Chicago Purchasers 50.5 49.7
11/30 10:00 Oct. Construction Spending -0.3% 0.3%

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: November 25, 2007 10:03 EST

Mortgage Failures Could Create Nightmare

Saturday November 24, 12:02 am ET
By Joe Bel Bruno, AP Business Writer

New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario

NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.
His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs.

Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.

In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is anyone's guess, but some believe it could become very bad.

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the Sept. 11, 2001, terror attacks hurt the transportation and allied industries. Economists said the country was officially in recession from March to November of 2001, but the aftermath stretched to 2003.

There is increasing evidence that another downturn has begun.

Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from Arlington, Va.-based investment bank Friedman, Billings Ramsey. That's making it even harder for would-be buyers to get new mortgages -- a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the third quarter from a year earlier, to 446,726 homes nationwide, according to Irvine, Calif.-based RealtyTrac Inc. That's one foreclosure filing for every 196 households in the nation, a 34 percent jump from just three months earlier.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

Some homebuyers gambled on interest-only loans. The mortgages, which allowed buyers to pay just interest at a low rate for two years, were too good to pass up. But with that initial term now expiring, many homeowners find they can't make the payments. The hopes that went along with those mortgages -- that they'd be able to refinance because the equity in their homes would appreciate -- have been dashed as home prices skidded across the country.

"It's been said a lot of people have been using their homes as ATM machines," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant. "The risk has a lot of tentacles."

This example illustrates the distress many homeowners are in or will find themselves in: A subprime adjustable-rate mortgage on a $400,000 home could have payments of about $2,200 a month, with borrowers paying 6.5 percent, interest only. When the teaser period expires, that payment becomes $4,000, with the homeowner paying 12 percent and now having to come up with principal as well as interest.

Minneapolis resident Chad Raskovich found himself in a such a situation. He hoped -- it turned out, in vain -- to gain more equity in his home and that a strong record of payments would enable him to secure a better loan later on.

"It's not just me, it's a lot of people I know. The housing market in the Twin Cities has dramatically changed for the worse in the years since I purchased my home. Now we're just looking for a solution," he said.

Colombo, who lives in the planned community of Weston just outside Ft. Lauderdale, said the reset on his home would have "destroyed' his financial situation. He went to Mortgage Repair Center, one of hundreds of debt counselors trying to bail out desperate homeowners, to work with his lender.

"But many people in my neighborhood didn't get help, and some have literally just walked away from their homes," said Colombo. "There are over 133,000 homes on the market in Broward-Miami-Dade counties, and some of them were actually abandoned. People in this situation don't like to talk about it, and end up getting hurt because they don't."

Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy.

But the series of plunges that Wall Street has suffered in past months prove that no one is immune when mortgages turn sour.

Today's financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.

When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans and the securities that underpin them are in jeopardy.

This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks -- losses that could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on.

There's more pain left for Wall Street: "We're nowhere close to the end of the collapse," said Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisors, a hedge fund that specializes in distressed funds.

"I just assumed banks could stomach these kind of losses," said Wendy Talbot, an advertising executive when asked about the subprime crisis outside of a Charles Schwab branch in New York. "I guess you don't really pay attention to things until your forced to. ... You put out of your mind the worst things that can happen."

The subprime wreckage could dwarf the nation's last big banking crisis -- the failure of more than 1,000 savings and loans in the 1980s. The biggest difference is that problems with S&Ls were largely contained, and the government was able to rescue them through a $125 billion bailout.

But this situation is far more widespread, which some experts say makes it more difficult to rein in.

"What really makes this a doomsday scenario is where would you even start with a bailout?" housing consultant Lawler asked.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

"There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle," Schumer said. "You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

There's also been talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors. This would extend the government's support, and its exposure, to the mortgage market to help alleviate stress.

Either way, the impact of a fresh round of subprime losses remains of paramount concern to economists -- especially since there's little certainty about how it would ripple through the U.S. economy.

"We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it," said Lawler, who was once chief economist for Fannie Mae.

"We've never been in this situation before."

When the levee breaks

CHUCK JAFFE
By Chuck Jaffe, MarketWatch
Last Update: 4:21 PM ET Nov 22,

Even average homeowners feel rising mortgage floodwaters

BOSTON (MarketWatch) -- While the headlines have been full of stories on the credit crunch, subprime mortgage mess and the real estate bubble, a lot of ordinary homeowners have figured they were immune from the problems.

Ensconced in a home with a prime mortgage, they have watched the news and figured they're safe. And all the while, the water has been rising.

With property values dropping in many areas of the country, a growing number of homeowners -- particularly those who bought their house in the last five years -- are looking at the prospect of being "underwater" on the mortgage. That's when the value of the home is less than the amount remaining on the loan used to buy it.

So while the nation has been focused on a record-high rate of foreclosures, the tide has been rising on a lot of people who simply had bad timing. Zillow.com, an online real estate community, reported Tuesday that home values nationally are down more than 5.5% compared with a year ago, with many markets being hit much harder.

As a result, according to Zillow, more than 15% of homeowners nationwide who bought their home in the last year are now underwater. The number is slightly worse for consumers who bought their home two years ago. By comparison, the study showed that just under 2% of people who purchased a home five years ago have seen their equity go negative.

"We are so used to the fantasy that real estate is a great investment and that it always goes up in value that we're surprised when it doesn't," says Marc Eisenson of Good Advice Press, author of the 1980s classic "The Banker's Secret," the book which first taught Americans the value of prepaying mortgages and auto loans.

"This is a scary place to be, and a lot of people who never expected to get here are watching the waters rising -- particularly if they have adjustable-rate mortgages -- and their home values sinking."

Being underwater on a loan -- and it's increasingly common on auto loans in this country too -- is not really a function of interest rates and payments. The problem that adjustable-rate mortgages pose in this market is more psychological, in that the borrower's payments are likely to rise while the asset they are paying for is depreciating. The amount owed is the same before or after the adjustment, but the higher payments simply make the situation feel more helpless.

Riding it out

Thankfully, most experts suggest that negative home equity is not something that should cause a panic, assuming the homeowner can afford the current mortgage payment and has no reason to move.

"It could take five years or longer before this thing swings around, but as long as cash flow is positive -- so that you're making the payments and living life without worrying where the equity stands in your home -- you can ride this out," says Paul Richard, director of education at the Institute for Consumer Financial Education. "The question is whether you will want to hold on to your investment if you have lost 10% or 15% or more and don't see it turning around. ... You wouldn't want to do that with most mutual funds, but you will have to decide if you will do it with your house."

For most homeowners, selling the home doesn't necessarily solve the problem. After all, if they are underwater on the mortgage, they will need to bring cash to the closing. And while they may be able to buy the next home for a lot less -- due to the drop in home prices -- there is no guarantee they will get a good mortgage rate to make the deal happen.

Renting and waiting out the decline and the real estate cycle is an option, but more for the prospective home buyer rather than the person who is up to their neck on the mortgage.

"If you can afford the payments and bought in a market that you believe will go up, then the way out of this is to drive through it, keep making the payments and plan to hold on long enough so that it pays off," says Greg McBride, senior financial analyst for BankRate.com. "It's only a real problem if you're going to have to sell the house in these conditions, or if you can't make the payment."

Watch your dollars

That said, most experts also believe that when the waters are coming closer to your personal shore, you might want to change a few behaviors, even if you plan to stay in the house and ride it out.

For starters, put off significant investments in the home. While real estate agents frequently say that certain home improvements "pay for themselves" when the home is sold, that's not the case in a market where home prices are shrinking and mortgages are underwater. Instead, you're simply adding more water.

Says Eisenson: "If you want a new bathroom while your house is underwater, you need to be really confident that you can ride things out. ... Right now, you're making the situation worse by putting more into the home at a time when you possibly won't make it back."

Next, bolster the emergency fund, just in case. It's not just financial problems making headlines, but economic ones; if the economy hits home in the form of job loss, at a time when the home is underwater, the choices you're facing are ugly. A bigger cash cushion will keep options open.

Experts disagree on whether you should pay off the mortgage faster when it's underwater; paying additional principal drops the water level, but that money is not coming back if you have to move and sell the house before the market rebounds.

Paying down other debts, or putting excess cash into investments that will be positive while real estate is in the doldrums may do more to improve a homeowner's overall financial position.

Says Eisenson: "This situation is going to get worse before it gets better, so think about what you would do now. You'll probably decide to try to push through it, but if you're unprepared and you wake up one day to find out you're underwater, you're going to be scared."

Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.

17 reasons America needs a recession

Think positive, this 'slow motion train wreck' is good for the U.S.

By Paul B. Farrell, MarketWatch
Last Update: 6:53 PM ET Nov 19, 2007

ARROYO GRANDE, Calif. (MarketWatch) -- Yes, America needs a recession. Bernanke and Paulson won't admit it. And investors hate them. We're all trapped in outdated 1990s wishful thinking about a "new economy" and "perpetual growth."

But the truth is, not only is a recession coming, America needs a recession. So think positive: Let's focus on 17 benefits from this recession.

To begin with, recession may be an understatement. Jeremy Grantham's GMO firm manages $150 billion. In his midyear report before the credit crisis hit he predicted: "In 5 years I expect that at least one major 'bank' (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private-equity firms in existence today will have simply ceased to exist."

He was "watching a very slow motion train wreck." By October, it was accelerating: "Train hits end of track at full speed."

Also back in August, The Economist took a hard look at the then emerging subprime/credit crisis: "The policy dilemma facing the Fed may not be a choice of recession or no recession. It may be between a mild recession now, and a nastier one later."

However, the publication did admit that "even if a recession were in America's long-term economic interest, it would be political suicide" for Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to suggest it.

Then The Economist posed the big question: Yes, "central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether."

Wrong to prevent a recession? Why? Because recessions are a natural and necessary part of the business cycle. Remember legendary economist Joseph Schumpeter, champion of innovation and entrepreneurship?

Economists love Schumpeter's "creative destruction:" Obsolete firms get destroyed and capital released, making way for new technologies, new businesses, like Google. And yet, nobody's willing to apply Schumpeter's theory to the entire economy ... and admit recessions are a natural part of the business cycle.

Instead, everyone persists in the childlike fairy tale that "all growth is good" and "all recessions are bad," a bad hangover of the '90s "new economy" ideology. So for the folks at the Fed, Treasury and Wall Street, "eternal growth" is still America's mantra.

Unfortunately, the American investors' brain has also developed this blind obsession with "growth-at-all-costs," coupled with a deadly fear of all recessions, as if recessions are a lethal super-bug more powerful than Iran with a bomb.

Our values are distorted: It's OK to be greedy and overshoot the market on the upside -- grab too many assets, take on too much debt, make consumer spending a religion, live beyond our means, ignite hyperinflation along the way. Growth is good, even in excess.

And yet, recessions are a no-no that drives politicians, economists and investors ballistic.

Well, folks, you can block all this from your mind, you can argue that recessions are not a part of Schumpeter's thinking, that they are inconsistent with your political ideology. But the fact is, we let the housing/credit boom become a massive bubble, it popped and a recession is coming. So think positive, consider some of the benefits of a recession:

1. Purge the excesses of the housing boom

No, it's not heartless. Not like wartime calculations of "acceptable collateral damage." Yes, The Economist admits "the economic and social costs of recession are painful: unemployment, lower wages and profits, and bankruptcy." But we can't reverse Greenspan's excessive rate cuts that created the housing/credit crisis.

It'll be painful for everyone, especially millions of unlucky, mislead homeowners who must bear the brunt of Wall Street's greed and Washington's policy failures.

2. U.S. dollar wake-up call

Reverse the dollar's free fall and revive our global credibility. Warnings from China, France, Iran, Venezuela and supermodel Gisele haven't fazed Washington. Recession will.

3. Write-offs

Expose Wall Street's shadow-banking system. They're playing with $300 trillion in derivatives and still hiding over $100 billion of toxic off-balance sheet asset-backed securities, plus another $300 billion hidden worldwide. A lack of transparency is killing our international credibility. Write it all off, now!

4. Budgeting

Force fiscal restraint back into government. America has been living way beyond its means for years: A recession will cut back revenues at all levels of government and cutbacks will encourage balanced budgeting.

5. Overconfidence

A recession will wake up short-term investors playing the market. In bull markets traders ride the rising tide, gaining false confidence that they're financial geniuses. Downturns bruise egos but encourage rational long-term strategies.

6. Ratings

Rating agencies have massive conflicts of interest; they aren't doing their job. They're supposed to represent the investors, but favor Corporate America, which pays for the reports. Shake them up.

7. China

Trigger an internal recession in China. Make it realize America's not going into debt forever to finance China's domestic growth and military war machine. A recession will also slow recycling their reserves through sovereign funds to our equities.

8. Oil

Force the energy and auto industries to get serious about emission standards and reducing oil dependency.

9. Inflation

Expose the "core inflation" farce Washington uses to sugarcoat reality.

10. Moral hazard

Slow the Fed from cutting interest rates to bail out speculators.

11. War costs

Force Washington to get honest about how it's going to pay for our wars, other than supplemental bills that are worse than Enron-style debt financing.

12. CEO pay

Further expose CEO compensation that's now about five hundred times the salaries of workers, compared with about 40 times a generation ago.

13. Privatization

Stop the privatization of our federal government to no-bid contractors and high-priced mercenary armies fighting our wars.

14. Entitlements

Force Congress to get serious about the coming Social Security/Medicare disaster.

With boomers now retiring, this problem can only get worse: A recession now could avoid a depression later.

15. Consumers

Yes, we're all living way beyond our means, piling up excessive credit-card debt, encouraged by government leaders who tell us "deficits don't matter." Recessions will pressure individuals to reduce spending and increase savings.

16. Regulation

Lobbyists have replaced regulation. Extreme theories of unrestrained free trade plus zero regulation just don't work; proven by our credit crisis, hedge funds' nondisclosures, private-equity taxation, rating agencies failures, junk home mortgages, and more. Get real, folks.

17. Sacrifice

"We have not seen a nationwide decline in housing like this since the Great Depression, says Wells Fargo CEO John Stumpf. As individuals and as a nation Americans have always performed best in crises, like the Depression or WWII, times when we're all asked to make sacrifices. Pampering us with interest-rate cuts and tax cuts during the Iraq and Afghan wars may have stimulated the economy temporarily, but they delayed the real damage of the '90s stock bubble while setting the stage for this new subprime/credit crisis.

Wake up, the train wrecked. Time to think positive, find solutions, demand sacrifices.

Goldman paints bleak picture for housing, financials

Tue Nov 20, 2007 7:19am EST

NEW YORK (Reuters) - Goldman Sachs issued a gloomy report on the U.S. financial services sector, saying housing prices are likely to fall a lot further, write-downs will mount and some mortgage insurers and guarantors will be forced to raise capital just to survive.

Falling house prices and a worsening economy will drive down securities based on residential mortgages, especially those given to borrowers with the riskiest credit, Goldman Sachs financial analysts Lori Appelbaum, Thomas Cholnoky, James Fotheringham and William Tanona, wrote in a lengthy report released on Monday.

Meanwhile, the value of collateralized debt obligations -- bonds based on pools mortgages -- related to those subprime mortgages, could fall another $150 billion across the industry, the bank said.

That's on top of the $18 billion financial firms globally wrote down in the third quarter and the $22 billion that some companies have indicated they expect in the fourth quarter.

Share markets across the globe sank after an earlier report from the Goldman analysts downgrading Citigroup (C.N: Quote, Profile, Research) reignited fears that losses from the global credit crisis may widen.

Stock benchmarks in the United States fell to their lowest levels in three months on Monday. In Asia MSCI's measure of other Asia Pacific stocks (.MIAPJ0000PUS: Quote, Profile, Research) hit its lowest level since late September. Financial stocks were among the worst affected.

Inevitability, certain financial guarantors and mortgage insurers will need to raise capital to shore up their balance sheets. The Goldman analysts said these companies will fall into two groups, the desperate -- those which will face the risk of going out of business if they don't raise capital -- and the needy -- those that could employ other means to do so, such as cutting dividends.

Goldman lists financial guarantors MBIA Inc (MBI.N: Quote, Profile, Research), Ambac Financial Group Inc, Security Capital Assurance Ltd (SCA.N: Quote, Profile, Research) and Assured Guaranty Ltd (AGO.N: Quote, Profile, Research) as the desperate. It lists Citigroup Inc, Washington Mutual Inc (WM.N: Quote, Profile, Research), First Horizon National Corp (FHN.N: Quote, Profile, Research) and National City Corp (NCC.N: Quote, Profile, Research) in the "needy" column.

Without the riskier loans such as subprime or no-or-low documentation mortgages, returns in the mortgage business will be significantly lower.

"Investor appetite for high-yielding subprime mortgage securities fuelled the home pricing bubble and this investor market is not coming back," the analysts wrote.

Brokers will rethink their business models focused on these exotic loans, the analysts said.

CONSUMER CREDIT FEAR

With home prices, consumer credit deterioration is not far off. The downturn in housing is spilling over into employment in some states and is leading to high consumer losses, the analysts said.

Falling home prices have put one-third of the United States, by Gross Domestic Product, in or near recession, the analysts wrote. California is the biggest concern as it represents 13 percent of the U.S. GDP. Card and auto losses will rise.

Although financial companies across the board have seen their stock prices walloped, despite attractive valuations, Goldman says a broad wave of industry consolidation is still another 12 to 18 months away.

"Credit risk, balance sheet deterioration, and business model risk continues to outweigh low valuations," the analysts wrote.

"We believe acquisitions are unlikely to occur until balance sheets stabilize and a market bottom is in sight," the analysts said.

Once U.S. housing shows signs of bottoming out, there will be some solid but tarnished companies investors will view as likely acquisitions targets.

Suitors are likely to come from all parts of the globe, even from emerging economies such as China or India, as the dollar remains weak.

"We would not be surprised to see the first acquisition of a major U.S. broker or commercial bank by an emerging market institution," the analysts wrote.

Earlier on Monday, the analysts downgraded Citigroup (C.N: Quote, Profile, Research) to a sell because of its exposure to CDO revaluations and Discover Financial Services (DFS.N: Quote, Profile, Research) because of its vulnerability to consumer credit deterioration. In the report, the analysts suggested pairing trades with these companies.

* Go long on American Express Co (AXP.N: Quote, Profile, Research) shares and short Discover

* Go long on Lehman Brothers Holding's (LEH.N: Quote, Profile, Research) shares and short Citigroup

Additionally, the firm believes that three financial "babies" have been "thrown out with the bathwater" and recommend buying American International Group Inc (AIG.N: Quote, Profile, Research), US Bancorp (USB.N: Quote, Profile, Research) and aircraft lessors, such as AerCap Holdings NV (AER.N: Quote, Profile, Research), Aircastle (AYR.N: Quote, Profile, Research), and Genesis Lease Ltd (GLS.N: Quote, Profile, Research).

Additionally it recommends another pair trade; go long on U.S. Bancorp's shares and short First Horizon.

(Reporting by Ilaina Jonas; editing by Louise Heavens)

Freddie Mac loses $2B, seeks new capital

By MARCY GORDON, AP Business Writer

WASHINGTON - Freddie Mac, the nation's No. 2 buyer and guarantor of home loans, lost $2 billion in the third quarter and said Tuesday it must raise fresh capital to meet regulatory requirements. Its shares fell more than 26 percent.

The quarterly loss was the largest ever for Freddie Mac which, like its larger government-sponsored competitor Fannie Mae and a number of large investment banks, has been slammed in recent months by rising defaults on home mortgages.

The mortgage financier said it is "seriously considering" cutting in half its dividend in the fourth quarter and has hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as financial advisers to help it examine possible new ways of raising capital in the near future.

Freddie Mac said it set aside $1.2 billion in the turbulent July-September period to account for bad home loans, reflecting "the significant deterioration of mortgage credit."

Executives said Tuesday there was little to be optimistic about in the fourth quarter and told investors to brace for more of the same, sending shares on the greatest one-day plunge since public trading began for Freddie nearly two decades ago.

Losses widened from $715 million during the same period last year. The report sent shares tumbling $9.89 to $26.37 Tuesday.

The company posted negative revenue of $678 million, as it sustained losses under generally accepted accounting principles of $3.6 billion in the quarter. The revenue compared with positive revenue of $91 million a year earlier.

The $2 billion third-quarter loss for McLean, Va.-based Freddie Mac worked out to $3.29 a share, compared with $1.17 a share in the third quarter of 2006.

Losses far exceeded Wall Street analysts expectations of a 22 cent per-share loss, according to a poll by Thomson Financial.

The results for Freddie Mac, together with a recent report by Fannie Mae, heighten investor anxiety over the government-sponsored companies, which had been considered less vulnerable in the housing crisis because they have had less exposure to high-risk, subprime mortgages.

Freddie Mac's regulatory core capital was estimated to be just $600 million in excess of the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight.

If dividend cuts and other actions aren't sufficient to help the company reach its government-mandated level of capital held in reserve as a cushion against risk, Freddie Mac said it may consider other measures such as limiting its growth, reducing the size of its mortgage investment holdings or issuing new stock.

That could put additional strain on a housing market suffering the worst slump in more than 15 years.

Freddie Mac has traditionally funded the mortgage market when other banks pull back because of risk.

An inability by Freddie Mac to fill that role could hinder a return to equilibrium in the mortgage market and possibly intensify the housing downturn.

"Without doubt, 2007 has been an extremely difficult year for the country's housing and credit markets and, as our third-quarter financial results reflect, we have been impacted by the deterioration in these markets," company Chairman and CEO Richard Syron said in a statement. "We recognized the challenges facing the mortgage markets, however, and have taken further steps to address them."

So far this year, Freddie Mac has recognized $4.6 billion in pretax credit related items.

Buddy Piszel, chief financial officer, said Freddie Mac is moving to stem losses.

"We have begun raising prices, tightened our credit standards and enhanced our risk management practices," Piszel said. "We also continue to improve our internal controls."

"We were getting thin" in terms of excess capital, and Freddie Mac decided it needed to bolster its capital "to manage through this credit cycle," Piszel said in a telephone interview. That cycle isn't expected to improve until 2009, he said, with home prices projected to register a 5 percent to 6 percent decline nationwide.

__

On the Net:

Freddie Mac: http://www.freddiemac.com

Fannie Mae: http://www.fanniemae.com

Commentary: U.S. economy is freezing up

IRWIN KELLNER
Rough patch or briar patch
By Dr. Irwin Kellner, MarketWatch
Last Update: 11:29 AM ET Nov 20, 2007Print E-mail Subscribe to RSS Disable Live

PORT WASHINGTON, N.Y. (MarketWatch) -- Whether the Federal Reserve realizes it or not, the United States economy is reeling from a one-two punch of plunging real estate values and a full-blown credit crunch that might not be alleviated with additional rate cuts.

While the Fed might have had a role in creating what has come to be known as the subprime mess, because of the way it has evolved, the Fed's ability to deal with it is rather limited. There are a number of reasons for this.

First and foremost is the fact that, on the real estate side, the damage has already been done.

Because short-term interest rates today are well above the 45-year lows plumbed from the middle of 2003 through mid-2004, those mortgages with adjustable rates have -- or will -- reset to much higher rates even if the Fed decides to lower rates by a quarter of a point or even more.

As a consequence, there will likely be more delinquencies and foreclosures, which, besides causing pain for those homeowners, will result in more homes on the market, thereby depressing their prices.

In turn, this will affect other homeowners -- even those with fixed rate mortgages and who and are current with their payments. They will likely be unable to use their homes as ATMs, tapping the equity to supplement their incomes.

They can't turn to savings, either, since, collectively, the nation's homeowners have been spending more than they have been earning for the past two years. The last time this happened was at the bottom of the Great Depression.

This alone is why consumers are reducing their outlays on all kinds of goods and services -- luxuries and necessities alike. Indeed, you know there's a problem out there when Starbucks (SBUX:Starbucks Corp SBUX 22.91, +0.04, +0.2%) reports a decline in traffic in response to -- among other reasons -- a 9 cent hike in the price of a cup of coffee.

Another reason why the Fed alone will not be able to ameliorate this crisis is that its main jurisdiction is over the banks -- and the problem is now centered in the financial markets. This is because the banks no longer have these loans on their books, having turned them into securities and sold them to others.

In turn, these mortgage-backed securities were used as collateral for the issuance of debt, whose value, as you know, is far lower than originally thought.

This has caused massive write downs by holders of these securities, cutting into their profits -- but, more important, depleting confidence in the financial system.

And this reduction in confidence is spreading beyond the financial markets and residential real estate to commercial real estate as well.

To the extent the banks are involved (by holding on to some of these securities), their capital is being reduced and thus their ability to make new loans.

I need not remind you that the ability to borrow money is the lifeblood of not just business --but consumers, too.

Not surprisingly, the combination of lower real estate values and reduced availability of funding is beginning to reduce business spending on new plants and equipment. This is overwhelming the positive effect that the lower-valued dollar is having on our exports.

So while the Fed is preoccupied with communications and forecasting, the financial markets remain frozen while the economy is melting down.

Talk about fiddling while Rome burns.

Irwin Kellner is chief economist for MarketWatch and for North Fork Bank.

Kass: They're Still Not Getting It on Housing

We need more of these reality checks (see article below). Too many folks are trying to broad brush the housing decline as a short-term, economically contained event. I don't buy it. This will be a steep and long decline, and there is and will be spillover impact into the broader economy. I always appreciate candor from smart investment types, and i don't think it gets better than this: (Vito Boscaino)


By Doug Kass
RealMoney Silver Contributor
10/25/2007 3:14 PM EDT
URL: http://www.thestreet.com/newsanalysis/newsonthego/10386473.html

This blog post originally appeared on RealMoney Silver on Oct. 25 at 7:26 a.m. EST

Last night I appeared on CNBC's "Kudlow & Company" with my favorite host, Larry Kudlow, and I went face to face with Dr. Wayne Angell, Jim Lacamp, Dennis Kneale and Dr. Robert Shiller.

I want to give you a rundown of the show because it offers pretty clear evidence that many of the same misconceptions that surrounded the inflating of the housing bubble are still around -- and as such are still dangerous to your financial well being.

So read on.

Most of last night's discussion involved the subject of housing and the meaning of yesterday's turnabout in equities.

Angell encouraged the Fed to move aggressively in order to revive the housing markets. Later on, I questioned him on this, asking why another rate cut would help when the September cut didn't -- indeed industry statistics have worsened. He just said I was wrong, but I didn't really get an explanation.

Shiller put the magnitude of the housing situation in perspective. The two-year housing drop has continued, and the future outlook is not optimistic for the sector as the correction will continue for some time.

The optimism from the panelists was summarized by my pal Dennis, who started by denying that there was a housing problem, and stating that the housing bogeyman is not that important, that most homeowners have benefited from the rise in home prices during this decade -- and even if they sold, they would end up well. He went on to say that the recovery in stocks yesterday was testimony to the bull market.

What?

I accused Dennis as being too linear in his comments, especially on the market. By that, I meant that diagnosing the recovery in equities (in any one day) and making a grand statement about its import was a one-dimensional (or linear) way of looking at things.

The investment mosaic is multidimensional and incorporates a lot more than just recent market behavior. From my perch, his view of the meaning of the market recovery on Wednesday could prove as wrong as when many made the incorrect observation when homebuilder stocks rallied impressively in May 2007 that this was an indication of a likely recovery in the housing markets.

I asked, what would he have said after Friday's schmeissing? "Buy," he said. Point made: Buy when they drop; buy when they pop.

On housing, I expressed the view to the panelists that leaning on the Fed with shock and awe (again) next week would have little positive effect on the housing markets, just as the last 50 basis point had no impact (as housing statistics continue to move lower). The affordability issue remains unresolved, and the inventory of unsold homes remains at record levels -- and, according to traffic readings, looks to worsen in the months ahead.

As to Dennis' remarks that most consumers are well off after the long rise in home prices, I expressed the view that the problem was the mortgage loans that were made at the margin over the last three years; they are coming back to bite the homeowner in mortgage rate resets in lower home prices and in a difficulty getting a loan as the originating business evaporates.

Jim Lacamp expressed the bullish view that the housing market will be "ring-fenced" and will not spill over into the economy or capital markets and that the fact that the markets are where they are is proof positive of the market's strength. He used the metaphor of "rope a dope" as an expression of the market's continued vigor. That reminds me of something that Jeremy Grantham recently wrote in this month's GMO Quarterly Letter:

Of course, I am fed up. We had Risk on the ropes. His followers were panicking. They were calling for the ref to stop the fight: "He has absolutely no idea how badly our boy is hurting ... He has no idea!" And what does the ref do? Ends the round early, extends the break, and allows a dangerous injection of adrenaline. Risk then leaps out of his corner, apparently rejuvenated, and wins the next couple of rounds. And here we are, wondering whether Risk has taken enough punishment to make him vulnerable to a knockout blow in a later round. Or has he completely recovered?
-- Jeremy Grantham, GMO Quarterly Letter, October 2007

From my perch, the bulls continue to ignore the ramifications of the housing market's depression not only on the economy but the spillover and contagion in the credit markets.

For example, ignored in last night's conversation was how the subprime fiasco has devastated the credit markets, as evidenced by the continued structured investment vehicle problems and the huge writeoffs of permanent capital at the leading money-center banks and investment bankers.

It is astonishing to me that the subprime-/housing-induced inflection point in credit, from credit expansion to credit contraction, continues to be ignored by market and economic bulls.

The ironic thing of course was that after several of the guests denied the very existence of the housing problem (what...? again), the next two segments were dedicated to Countrywide Financial's (CFC) deal to renegotiate some of its adjustable-rate mortgages and the implications of Chapter 13 bankruptcy filings on homeowners whose mortgage problems have accumulated.

I have mentioned in the past that a 20% drop in home prices, as currently predicted in the Case Shiller Futures Index by 2011, means that about $4 trillion of consumer wealth will be wiped out. Another $500 billion to $1 trillion of losses looks to be taken by the financial institutions and hedge funds from the collateralized debt obligation mess.

That's close to the amount lost after the tech bubble -- and very large in the context of a $13 trillion U.S economy (the number Larry used last night). Moreover, the financial industry's reluctance to provide credit to homeowners provides another important economic headwind.

The housing problem ring-fenced? Not likely.

Housing Slump May Reduce Payrolls, Growth: U.S. Economy Preview

By Joe Richter

Oct. 28 (Bloomberg) -- Smaller employment gains and slower growth signal the two-year U.S. housing slump is reverberating through the economy, economists said before reports this week.

Employers added 80,000 workers to payrolls this month following an increase of 110,000 in September, based on the median forecast in a Bloomberg News survey of economists before a Nov. 2 government report. Figures two days earlier may show the economy expanded at a slower pace in the third quarter.

Manufacturers fired workers for a 16th consecutive month in October, while declines in subprime-mortgage lending and homebuilding led to job losses at construction companies and financial institutions. Federal Reserve policy makers will lower the target interest rate again this week to sustain the expansion through the real-estate crash, economists said.

``Evidence on the labor market is that things are on the soft side,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The Fed is likely to cut rates as insurance.''

The Labor Department's employment report may also show the unemployment rate held at 4.7 percent for a second month, based on the survey median.

Factory payrolls probably shrank by 15,000 workers this month, the survey showed, capping an almost 200,000 decline in employment at manufacturers since the same month last year. Economists at Lehman Brothers Holdings Inc. in New York are among those also forecasting declines at homebuilders and financial firms.

Mortgage Firings

Countrywide Financial Corp., the biggest U.S. mortgage lender, is in the process of cutting 10,000 to 12,000 jobs because of the drop in loans. The Calabasas, California-based company last week reported its first quarterly loss in 25 years and said profit would rebound in coming quarters.

Lennar Corp. Chief Executive Officer Stuart Miller said in a Sept. 25 statement that the company has cut 35 percent of its workforce and will continue to eliminate jobs to ``bring us back to profitability.'' Miami-based Lennar is the largest U.S. homebuilder.

Gains in wages and hours worked at service industries, such as health care and education, are giving the majority of employed Americans the means to keep spending, helping to prevent the economy from succumbing to the housing slump, economists said.

Earnings per hour rose 0.3 percent on average in October after a 0.4 percent gain the month before, the survey showed.

A Commerce Department report on Oct. 31 may show the economy cooled in the third quarter as a result of the decline in residential construction, while consumer spending quickened.

GDP Cools

Gross domestic product rose at an annual rate of 3.1 percent from July through September, compared with a 3.8 percent growth rate the prior quarter, according to economists surveyed. Consumer spending, which accounts for more than two-thirds of the economy, expanded at a 3.2 percent pace, more than double the second quarter's growth rate.

A Commerce Department report Nov. 1 may show consumer spending grew in September. Purchases increased 0.4 percent after a 0.6 percent gain the prior month, based on the median forecast. Incomes rose 0.4 percent after a 0.3 percent August increase, the survey showed.

Still, the meltdown in subprime lending and turmoil in credit markets raises the risk the real-estate slump will worsen and spread to consumer spending. After meeting for two days, Fed policy makers will probably lower the benchmark interest rate on Oct. 31 to 4.50 percent from 4.75, the second cut in as many months, economists said.

Bigger Slowdown

Growth is expected to slow to a 1.8 percent pace this quarter as spending cools, based on a Bloomberg survey of economists this month.

There are signs the housing slump is starting to spill over to other industries.

A report from the Institute for Supply Management on Nov. 1 may show manufacturing grew in October at the slowest pace in seven months. The ISM's factory index probably fell to 51.5 this month from 52 in September. A reading greater than 50 signals expansion in manufacturing, which accounts for about 12 percent of gross domestic product.

Midland, Michigan-based Dow Chemical Co., the largest U.S. chemical maker, said third-quarter earnings dropped as the decline in housing reduced demand for latex and pipe-making materials. Slumps in the U.S. automotive and housing markets are hurting sales of wire, coatings and solvents, Dow Chief Executive Andrew Liveris said Oct. 25.

The economic slowdown will gradually push unemployment higher as businesses trim costs, economists said. The jobless rate will probably rise to 5 percent by the second half on next year, based on the Bloomberg survey earlier this month.

``The economy will still be creating jobs, but not enough to keep the unemployment from rising,'' Global Insight's Gault said.



Bloomberg Survey

Date Time Period Indicator BN Survey Prior
10/30 10:00 Oct. Confidence-Conf. Board 99.0 99.8
10/31 8:30 3Q Employment Cost Index 0.9% 0.9%
10/31 8:30 3Q A GDP Price Index 2.0% 2.6%
10/31 8:30 3Q A Gross Domestic Product 3.1% 3.8%
10/31 10:00 Oct. Chicago Purchasers 53.0 54.2
10/31 10:00 Sept. Construction Spending -0.5% 0.2%
11/01 8:30 10/13 Continuing Claims 2532.5K 2530K
11/01 8:30 10/20 Initial Jobless Claims 330K 331K
11/01 8:30 Sept. Personal Income 0.4% 0.3%
11/01 8:30 Sept. Personal Spending 0.4% 0.6%
11/01 10:00 Oct. ISM Manufacturing 51.5 52.0
11/01 10:00 Oct. ISM Prices 63.0 59.0
11/02 8:30 Oct. Avg. Hourly Earnings 0.3% 0.4%
11/02 8:30 Oct. Change Nonfarm Jobs 80K 110K
11/02 8:30 Oct. Unemployment Rate 4.7% 4.7%
11/02 10:00 Sept. Factory Orders -0.5% -3.3%
To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net .

U.S. Homeownership Falls in Longest Slide Since 1981 (Update1)

By Bob Willis

Oct. 26 (Bloomberg) -- Homeownership in the U.S. dropped for a fourth consecutive quarter, the longest string of declines since at least 1981, a sign that the key means of building assets for millions of Americans is weakening.

The homeownership rate, the percentage of households that own their residences, fell to 68.1 percent in the July-September period from 68.3 percent in the prior three months, according to a report today from the Census Bureau in Washington. The rate has been declining from a peak in 2004, which culminated a decade of gains fueled by easier lending standards and rising ownership for immigrants and younger households.

``Owning a home in this country has been a principal source of wealth creation for low- and moderate-income people,'' said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies in Cambridge, Massachusetts. ``In the absence of home equity, families will inevitably spend less.''

Homeowners accumulate wealth faster than renters, with median net wealth for owners at $184,400 in 2004, compared with only $4,000 for renters, according to Federal Reserve figures.

Homeownership reached a record 69.3 percent of households in 2004, up from 64 percent a decade earlier. With home prices soaring, net household wealth nearly doubled to $51.8 trillion at the end of 2005 from $27.6 trillion in 1995, with real-estate accounting for 47 percent of the change, according to Federal Reserve data.

New Mortgage Products

A September study by the Fed Bank of Atlanta found that as much as 70 percent of the increase in the aggregate homeownership rate over the decade was due to the introduction of new mortgage products, including second mortgages. Demographics, including the rapidly growing immigrant population, accounted for up to 31 percent of the increase, said the study.

Now, declining ownership rates mean fewer Americans will be able to tap housing equity to fund education, vacations and other spending. The trend also signals potential further declines in new-home sales that may extend the drag on growth from falling construction, said Jan Hatzius, chief economist at Goldman Sachs Group Inc. in New York.

Vacant Homes at Record

The Census Bureau report also found that a record 17.9 million U.S. homes stood empty in the third quarter as lenders took possession of a growing number of properties in foreclosure.

The figure is a 7.8 percent gain from a year ago, when 16.6 million properties were vacant, the Census Bureau said. About 2.07 million empty homes were for sale, compared with 1.94 million a year earlier, the report said.

Slowing residential construction has detracted from growth in gross domestic product for the last six quarters through June, shaving as much as 1.3 percentage point off growth in the third quarter of 2006, when the overall economy grew at just a 1.1 percent pace. Most economists forecast an extended construction drag on growth after credit tightened further in August amid subprime-market turmoil.

``If homeownership declines significantly, the implications for new-home sales could be dramatic,'' said Hatzius. With further weakness in sales, ``the drag from new-home building on GDP growth will last longer than most people have in their forecasts, perhaps, if things go badly, into 2009.''

Housing Starts

Housing starts, which track work begun on new homes, fell 48 percent to a 1.19 million annual pace in September from a three-decade peak of 2.29 million in January 2006. Sales of new homes declined 45 percent to an annual pace of 770,000 units in September from a peak of 1.389 million in July 2005.

With inventories of unsold homes piling up near record levels, housing prices will have to fall further, economists say.

Twenty-eight percent of all homeowners surveyed this month felt their property had lost value, surpassing the peak of 24 percent reached during the last real-estate slump in 1992, according to a Reuters/University of Michigan report today.

Home prices in 20 U.S. metropolitan areas dropped 3.9 percent in July from a year earlier, the biggest such decline since record-keeping began in 2001, according to the S&P/Case- Shiller home-price index.

Goldman Sachs is forecasting a 15 percent decline in home prices from the peak to trough, Hatzius said.

Less Wealthy

Hatzius and other economists argue that declining home prices leave Americans feeling less wealthy and less likely to spend on big-ticket items. Economists surveyed by Bloomberg forecast consumer spending growth to slow to a 2.3 percent pace in 2008 from this year's projected 2.9 percent pace.

``In periods of easy credit, it was easy to take a second mortgage out and use the money to finance discretionary spending,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York.

Second mortgages, along with interest-only, payment-option and other unconventional mortgage products, have largely dried up this year as subprime defaults mounted and lenders such as American Home Mortgage Investment Corp. closed their doors. That makes it harder for people to refinance adjustable-rate loans before they reset at higher rates.

``So many mortgages with ARMS are resetting and most people can't make their payments,'' said Steve Hawkins, a real-estate agent at Re/Max Inc. in Alexandria, Virginia. ``And with the new criteria, they can't get loans'' to refinance their mortgages, he said.

The volume of mortgages issued this year will fall to the lowest since 2000, the Mortgage Bankers Association forecast on Oct. 17. Foreclosures doubled in September from a year earlier, RealtyTrac Inc. said Oct. 11.

Out of 297 townhouses in Springfield, Virginia, for sale last week, almost 80 were in the process of foreclosure or offered at a price lower than the mortgage balance, so-called short sales, said Hawkins.

Two years ago there would have been about 50 such units offered in the same Washington suburb, with none in foreclosure, he said.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net