Mortgage And Real Estate News

Sunday, July 31, 2011

Almost half of mortgages in Arizona are 'underwater,' report says

WASHINGTON - Just under half of all Arizona mortgages were "under water" in spring of this year, the second-highest percentage in the nation, according to a report from a private research firm.

CoreLogic said only Nevada, at 63 percent, had a higher rate of homes under water at the end of the first fiscal quarter of 2011, the most recent period for which it had a report.

An underwater mortgage is a home with negative equity -- when a person owes more on their mortgage than their home is worth.

Arizona homeowners who were under water averaged $60,000 in negative equity, according to the report, below the national average of $65,000. New York borrowers held the highest negative equity with an average of $120,000, but only 6.2 percent of mortgages in that state were under water.

Phoenix was the third-highest metro area in the nation, with 55 percent of its mortgages under water, according to CoreLogic, trailing Las Vegas and Stockton, Calif.

Bankers in Arizona said they sense that foreclosures are starting to slow down, as the market attempts to stabilize.

"We may be bottoming out here," said Paul Hickman, president of the Arizona Association of Bankers.

Large surpluses of housing are still keeping both housing and banking in gridlock. But experts don't believe the situation can get worse than it is right now.

Hickman said the banks are trying to avoid foreclosures, if only to avoid having to pay to maintain them -- a cost that can grow exponentially with about 100,000 foreclosed homes in the state.

"Foreclosures are flattening, they are not putting all that inventory on top of current inventory," Hickman said.

But state housing officials say that requests remain high from people seeking help with their mortgage payments.

"We have been seeing a lot of activity," said Shaun Rieve, spokesman for the Arizona Department of Housing.

Rieve said that the department got more than $267 million from a federal program that targeted states with the biggest losses in the sub-prime mortgage crisis of 2008. The Principal Reduction Program could allocate up to $50,000 toward a homeowner's principal if the lender matched that amount, up to 31 percent of the mortgage, according to the state housing department.

But Rieve said few big lenders came on board with matching funds. He said Bank of America was one of the few to come on board, while the state "can't get Chase (Bank) or Fannie (Mae) and Freddie (Mac)" to sign on.

The department has since redirected $36 million to an unemployment assistance fund that pays up to $2,000 a month in mortgage to unemployed homeowners who meet other requirements. The new program has been far more successful, he said.

Lenders said they are also offering loan modification programs and financial counseling programs to assist borrowers with underwater mortgages.

Chase spokeswoman Mary Jane Rogers said the bank is opening more than 25 new homeownership centers nationally in 2011. The bank already has two centers in Arizona, one in Phoenix and one in Tempe.

She said borrowers can come into these locations six days a week to meet with a Chase adviser to work on alternatives to walking away from their homes.

"We do not want to own people's homes," Rogers said.

by Anthony DeWitt Cronkite News Service Jul. 25, 2011 06:45 PM



Almost half of mortgages in Arizona are 'underwater,' report says

Study: Arizona among worst states for consumer credit

The federal government isn't alone in facing debt challenges.

Arizona ranks as one of the worst states for consumer credit, according to a new study that analyzes five stress factors. The housing bust and a weak job market appear to be prime culprits.

Arizona ranked No. 46 among the 50 states, ahead of only Florida, California, Georgia and last-place Nevada - all epicenters of the housing boom/bust cycle.
http://azcentral.gon.gannettonline.com/apps/pbcs.dll/section?category=HOMES&pub=azcentral

The states with the most creditworthy residents mainly were spread across the Great Plains and upper Midwest, according to the study by CardRatings.com.

"The obvious pattern here is that unemployment tends to drive delinquencies and foreclosures," said Curtis Arnold, founder of Card Ratings.com and author of the study.

Arnold evaluated each of the 50 states across the five categories: average credit scores, foreclosure rates, credit-card delinquencies, bankruptcy rates and unemployment rates.

Arizona had a moderately worse-than-average jobless rate, at No. 35, but was much lower in the other variables, highlighted by the second-worst foreclosure ranking.

"That indicates something else (besides jobs alone) is going on there," Arnold said in an interview.

States with the strongest consumer-credit grades tend to be located where the boom-and-bust real-estate cycle didn't get out of hand.

North Dakota ranked as the state with the highest proportion of creditworthy residents, followed by Vermont, South Dakota, Nebraska and Montana.

These states also tend to have small and fairly homogeneous populations.

A recent Pew Research Center report found that African-Americans, Latinos and even Asian-Americans have seen their net worths decline more sharply than Whites over the past few years. That study cited high Hispanic concentrations in housing-stressed Arizona, California, Florida and Nevada.

Demographics thus could be another factor explaining low-credit profiles in Sunbelt states, though the CardRatings study didn't evaluate that.

One upshot from the study is that everyone in a poor-credit state stands to suffer, not just those with bad credit. This shows up in problems such as weak local banks that can't make loans, foreclosures that push down property values, heightened burdens on municipalities and slower economic growth.

"Even if you have stellar credit, you're not immune," Arnold said. "You are affected by your neighbor's credit."
Impact on cards

As the federal debt-ceiling deadline nears, here's a number to keep in mind: 14.1 percent.

That's the current average advertised interest rate on credit cards tracked by LowCards.com. Many observers have speculated that consumer borrowing costs could rise if the government's debt and budget impasse doesn't get resolved in a constructive way, and credit-card rates could be quick to increase.

"Nearly every credit card on the market today is a variable-rate card," said Bill Hardekopf of LowCards.com.

Most cards are tied to the prime lending rates set by banks, and they would rise if banks push their prime rates higher.

Unlike other rate hikes, which require a 45-day advance notice, that's not the case with increases tied to the prime, Hardekopf explained in a commentary.

"That increase can take place immediately," he said. "But any interest-rate increase will only apply to your future purchases, not your existing balance."

Incidentally, card interest rates are up from an average 11.6 percent tracked by LowCards.com in May 2009, when the government passed sweeping credit-card-reform legislation.
Complaints aplenty

Credit and debt issues ranked No. 2 on a new list of top consumer complaints.

Fraudulent offers to help save homes from foreclosures were among the fastest-growing complaints, according to the study by the Consumer Federation of America and National Association of Consumer Agency Administrators.

Credit/debt complaints trailed only those involving autos that centered around misleading advertising, sales and repair problems and towing disputes.

In the credit/debt area, the study's authors reiterated several reminders for consumers, such as these:

- Consumers can request in writing that debt collectors refrain from calling them.

- For-profit debt-relief and debt-settlement firms can't charge fees until they've obtained a satisfactory settlement.

- Mortgage-relief services can't charge for their help until they provide a written offer to modify a loan that the homeowner has accepted.

by Russ Wiles, columnist The Arizona Republic Jul. 31, 2011 12:00 AM




Study: Arizona among worst states for consumer credit

Real-estate expert sees disconnect in lending

Arizona State University professor and real-estate development veteran Mark Stapp sees a troubling disconnect between local efforts to build sustainable communities and the globalized mechanisms through which those efforts are funded.
The Phoenix-area commercial real-estate market's problems, which include but are not limited to $3.5 billion of securitized commercial mortgage loans currently in default, are largely the result of that disconnect, he said.

Stapp, still active as a developer, is executive director of the Master of Real Estate Development program at ASU's W. P. Carey School of Business.

He said communities need to get away from relying on massive, corporate lending institutions to fund the development of local real-estate projects. In other words, go back to the way things used to work: local investors funding local development.

Stapp explained the problem this way:

"Real estate is location-specific, unique and small, which makes it really hard to trade and value on a significant scale. Still, the financial world took properties with fundamental differences and bundled them together, in order to create a larger scale, offset transaction costs and trade a bunch of properties together (as commercial mortgage-backed securities)."

Each pool of disparate real-estate assets then was assigned a single investment rating, Stapp said.

"This overlooked the nuances of the individual properties," he said.

Stapp said it's not too late for areas such as metro Phoenix to turn back the clock by setting up local real-estate funds that would finance local development on a project-by-project basis. Everyone involved would benefit, he said, because investors would have more control over where their money was being spent, and developers would know that a project was being financed on its merits, not some financial algorithm devised hundreds of miles away.

by J. Craig Anderson The Arizona Republic Jul. 31, 2011 12:00 AM




Real-estate expert sees disconnect in lending

Phoenix-area homebuilders adjust to market

A deep plunge in both home foreclosures and pre-foreclosure notices in the second quarter ultimately could lead to a boost in business for Phoenix-area homebuilders, who have settled into a slow-but-steady sales pattern during the past two years.

However, builders and analysts said there were several other hurdles to be negotiated before the homebuilding industry could experience anything resembling a recovery.

Those challenges include the inability of many prospective buyers to obtain financing, lack of buyer confidence in the economy's future, a growing shortage of skilled labor in the homebuilding sector and continued stagnation in the Phoenix-area job market.

Executives at locally active builders, including Shea Homes, Taylor Morrison and Robson Communities said they had scaled back costs and are prepared financially to endure the remainder of the foreclosure era.

The builders said they did not expect to see a meaningful increase in sales for at least another year.

Still, they pointed to a number of positive trends that could turn out to be the seeds of a future uptick in new-home sales.

Those trends include the growing number of Baby Boomers reaching retirement age, increased foot traffic at new-home sales offices in the Phoenix area and a mild price recovery under way in the existing-home market.

Maricopa County home foreclosures decreased significantly in the second quarter, shrinking from 15,831 transactions in the second quarter of 2010 to 10,875 transactions, according to Mesa-based real-estate market research firm Ion Data.

Likewise, notices of coming foreclosure decreased from 19,664 notices in the second quarter of 2010 to 13,311 notices, Ion Data analyst Zach Bowers said.

It's not clear whether the lower numbers signify a decrease in unsustainable home loans or mortgage lenders taking a moment to catch their breath, analysts said.

Even if the drop in foreclosures continued, it still would be a long time before area builders felt the positive effects, said Jim Belfiore, a Phoenix-based analyst who covers the homebuilding industry.

"The foreclosure numbers are just so high," said Belfiore, president of Belfiore Real Estate Consulting. "We would need them to go down by 50 percent, and it's just not going to happen overnight.

"We still have 100,000 foreclosures to go, in my opinion."

There were 4,000 new-home permits issued in Maricopa County in the first quarter, down about 10 percent from 4,546 permits during the same period a year earlier, according to the most recent data available from the realty-studies program at Arizona State University's W.P. Carey School of Business.

Home-construction activity remained slow in the second quarter, commensurate with the lower sales volume that builders have experienced, said Pierrette Tierney, vice president of sales and marketing for Scottsdale-based homebuilder Taylor Morrison.

"Permits are down, but it's necessary to balance out the supply-and-demand scale," Tierney said.

Still, Tierney and other builders said sales per subdivision were tracking almost identically with 2010 figures, and that the year-over-year drop in sales is due primarily to the closing out of several subdivisions in 2010.

Belfiore confirmed that assessment, saying that average sales per subdivision in the second quarter was 1.7 homes, exactly what it had been during the same period of 2010.

The consistency of sales per subdivision belies a significant boost in foot traffic inside home-sales offices and model homes, which Belfiore described as both a blessing and a curse.

The good news, he said, was that the average number of potential buying parties per subdivision per week reached its highest level in three years during the second quarter.

The bad news is that as many as half of those interested buyers were denied a mortgage loan, Belfiore said.

"Thirty percent to 50 percent of the people who want a new home don't qualify for financing at this time," he said.

Ed Robson, founder and chairman of Sun Lakes-based Robson Communities, said financing had not been a problem for buyers approaching retirement age, the demographic on which Robson focuses most heavily.

The company's sales have remained steady this year compared with 2010 and are up 16 percent from 2008. Robson said Baby Boomers' lack of confidence in the country's economic future had been the primary factor preventing home sales in the age-restricted market.

Another problem Robson Communities has run into lately is a shortage of skilled labor, he said.

Robson said community rebuilding efforts in regions torn apart by floods or tornadoes have lured away many of the state's best contractors, some of whom were struggling in Arizona due to a lack of steady work.

Still, Robson said there was reason for homebuilders in the "active-adult lifestyle" market to be optimistic.

Their target audience, adults age 45 to 64, has swelled to more than 81 million, compared with just over 31 million in 2000.

Ken Peterson, Arizona vice president of sales and marketing for Walnut, Calif.-based Shea Homes, said recent home sales inside the company's Trilogy active-adult communities had outpaced sales in Shea's family-oriented neighborhoods.

But in general, Peterson said, homebuilders in the age-restricted market were no closer to a boom-era renaissance than those selling to buyers of all ages.

Builders and analysts said the key to surviving the next year or two was not some magic bullet but a constant effort to be more efficient, resourceful and responsive to market changes. Eventually, they believe, things will get better.

Robson, whose Sun Lakes development is one of the largest active-adult communities in the state, said there always will be people who want to buy a home and settle down in Arizona.

"We've got the sun and the weather," he said. "Where else are people going to go?"

by J. Craig Anderson The Arizona Republic Jul. 24, 2011 12:00 AM




Phoenix-area homebuilders adjust to market

Gilbert new-home construction on rise, leading Valley

Gilbert continues to lead the Valley in new-home construction, and the town has outpaced even Phoenix in single-family home permits issued each month this year.

After ending 2010 with five months of sluggish activity, homebuilding in Gilbert is on the rise again, more than doubling in pace from January to June, town records show.

Year-over-year permit numbers are climbing, and the town is on pace for its best year since 2007.

In January, Gilbert began to see a modest uptick in home permits issued with 63, a 26 percent jump from December.

The town then issued 88 single-family permits in February, and the number spiked 53 percent to 135 in March.

As homebuilding revs up, the town receives a financial boost through increases in system-development-fee and sales-tax revenue.

Gilbert assesses eight types of impact fees on developers that total $19,684 per single-family residential unit. The fees pay for infrastructure such as roads, water lines and public-safety facilities.

The town has brought in $2.1 million more in development fees than officials projected for the first 11 months of fiscal year 2011, which ended June 30.

Mark Toon, a designated broker for Re/Max Alliance Group in Gilbert, said agents in his office have noticed the surge in new-home sales.

"People are sick and tired of messing with short sales," Toon told The Republic. "It's getting to that point where the buyer is saying, 'I'll pay $50,000 more to get a brand new house in the neighborhood I want.' "

Many real estate agents recommend new homes to their clients, Toon said.

"You still don't get as much for your money as in a resale, but that's quickly changing," he said.

Meanwhile, the number of existing homes on the Valley market has fallen below 22,000, or about two months worth of inventory, Toon said.

The result is resurgence in consumer demand for new houses.

"It's just like it was in '05, except the prices are half of what they were," Toon said.

If the current pace holds in Gilbert, the town will issue more than 1,400 home permits this year, the most since 2,900 were issued in 2007.

From 1996 to 2006, Gilbert issued more than 3,000 home permits every year but one, according to Census Bureau statistics. In 2004, that number peaked at 5,071.

Then the recession put the kibosh on speculative construction, and the number of residential permits issued plummeted to 1,109 in 2008 before rebounding to 1,275 in 2009.

Most of the construction permits issued this year are for homes in south Gilbert, where developers are looking to finish partially-built neighborhoods.

Between Jan. 1 and May 16, 20 different homebuilders were issued permits, with Blandford Homes receiving the most, 68, according to statistics provided by Gilbert.

Other major players include Ashton Woods Homes, K. Hovanian Homes and Taylor Morrison.

Power Ranch, a giant master-planned community near Power and Germann roads, saw the most activity with 72 permits issued. Morrison Ranch, Seville and Lyons Gate also were among the hot spots.

At buildout, Gilbert's population is expected to exceed 300,000. Census 2010 figures put the town's current population around 209,000.

More on this topic
New-home permits


The number of single-family home permits issued in Gilbert has spiked after several months of sluggish activity late last year.
2011

January63

February88

March135

April151

May152

June131

Total720*

*On pace for 1,440.
2010

January128

February132

March159

April82

May70

June72

July93

August116

September57

October56

November46

December50

Total1,066



by Parker Leavitt The Arizona Republic Jul. 15, 2011 08:30 AM






Gilbert new-home construction on rise, leading Valley

Demolition site in Phoenix scheduled for trustee's sale

The 9-acre site of a 2009 office-building demolition in central Phoenix is now scheduled for foreclosure auction, according to a trustee's sale notice obtained from Mesa real-estate analysis firm Ion Data.

The property at 3033 N. Third St. once was the site of a 10-story office building that was constructed in the early 1970s for Mountain Bell, the telephone company that later became US West and then Qwest Communications.

The site was purchased in 2004 by developer Joe Pinsonneault, who had planned to convert it into a mid-rise retirement campus to be called Montage.

Although the Mountain Bell building, designed by the late Phoenix architect Al Beadle, had been considered by many to be historically significant and deserving of preservation, Pinsonneault was unable to rehabilitate it because it contained asbestos and had other health and safety issues.

Instead, the building underwent floor-by-floor asbestos removal, was stripped of its exterior glass paneling and finally imploded by a professional demolition team on Sept. 27, 2009.

The foreclosure notice, recorded by the Maricopa County Recorder's Office on July 7, lists the property owner as MAM Wealth Management Real Estate Fund I, LP, based in Encino, Calif.

The Federal Deposit Insurance Corp. is listed as beneficiary of the trustee's deed sale, scheduled for Oct. 6. The FDIC is acting as receiver for La Jolla Bank of Carlsbad, Calif.

by J. Craig Anderson The Arizona Republic Jul. 30, 2011 12:00 AM




Demolition site in Phoenix scheduled for trustee's sale

Scottsdale-based Meritage home sales, profits plunge

Without the benefit of a federal tax incentive for homebuyers, Scottsdale-based Meritage Homes Corp. suffered a sizable drop in home sales in the second quarter compared with a year earlier but still managed to avoid a net loss.

Meritage Homes, the only publicly traded homebuilder headquartered in Arizona, reported Friday a net income of $562,000 for the quarter ending June 30, an 87 percent decrease from the second quarter of 2010, when it reported net income of $4.2 million, according to documents filed with the U.S. Securities and Exchange Commission.

Revenue from the closing of home sales was slightly more than $220 million, a 24 percent decrease from the same period a year earlier.

The number of home sales closed was 856 units, a decrease of 29 percent from the second quarter of 2010.

On the positive side, there were 910 new orders for homes in the second quarter, an increase of 1 percent from the same period a year earlier. New sales orders represent future revenue for the company.

Meritage Homes, like all homebuilders in Arizona, benefited last year from a federal income-tax rebate of up to $8,000 for new homebuyers that only applied to new-home orders signed before May 1, 2010.

The incentive helped Meritage Homes, which trades on the New York Stock Exchange, enjoy its first profitable year since before the housing crash began.

But there are no incentives in play this year to goose home sales. The company experienced a net loss of $6.7 million in the first quarter, which company officials said was because of, in large part, the elimination of the tax rebate.

Given the context, Meritage Homes Chairman and CEO Steven Hilton indicated in the company's second-quarter report that even a small profit is a considerable accomplishment in the current housing market.

"We were pleased to achieve a small profit in the second quarter despite lower closings and revenue this year compared to last year, with nearly identical margins," Hilton said.

He also expressed optimism about the company's near future.

"Our goal is to be profitable in 2011 for the second consecutive year coming out of this recession, and we believe that we are well positioned to accomplish that goal," Hilton said.

by J. Craig Anderson The Arizona Republic Jul. 30, 2011 12:00 AM




Scottsdale-based Meritage home sales, profits plunge

Dissecting the rival debt plans' key differences

House Republicans and Senate Democrats are pressing competing plans to pair an increase in the nation's $14.3 trillion borrowing limit with spending cuts and to create a special committee to recommend bigger savings for a vote later this year.

In a change announced on Friday, House Republicans would make the bulk of the debt limit increase contingent on Congress adopting an amendment to the Constitution requiring a balanced budget and sending it to the states for ratification.

The chief difference is the size of the immediate increase in the debt limit. Senate Democratic leader Harry Reid's $2.4 trillion debt increase plan would keep the government afloat into 2013, while Republican House Speaker John Boehner's $900 billion increase would require action next year.

Highlights of the competing plans:

DEBT INCREASE

House GOP: Immediate $900 billion increase in the debt limit; $1.6 trillion more would be made available after enactment of up to $1.8 trillion in future spending cuts and by adoption by both House and Senate of an amendment to the Constitution requiring a balanced federal budget. That would require a two-thirds margin in both chambers.

Senate Democrats: Immediate $2.4 trillion debt limit increase.

SPENDING CAPS

House GOP: Cuts $756 billion over 10 years from the day-to-day operating budgets of Cabinet agencies. Caps new spending at $1.043 trillion in 2012, $7 billion below 2011 levels. Total cuts of $917 billion, including interest savings.

Senate Democrats: Nearly identical caps on agency budgets. Saves $1 trillion more by assuming steep cuts in war funding. Total cuts of $2.2 trillion, including interest savings.

SPECIAL COMMITTEE

House GOP: Creates a 12-person, House-Senate bipartisan committee evenly divided between the political parties; charged with producing up to $1.8 trillion more in deficit cuts over 10 years. If a majority of the committee agrees on a plan, it would receive a vote in both the House and the Senate.

Senate Democrats: Nearly identical provisions. The panel would be instructed to seek deficit cuts sufficient to bring annual deficits deficit down to about 3 percent of the size of the economy, a level considered sustainable. That would still leave deficits of about $550 billion in 2015 and about $700 billion in 2021, compared to a $1.3 trillion deficit last year.

OTHER

House GOP: Before any additional increase in the debt limit could take place, Congress must approve a balanced budget amendment to the Constitution and send it to the states for ratification. Establishes "program integrity" initiatives aimed at stemming abuses in benefits programs like Social Security; increases funding for Pell Grants for low-income college students by $17 billion over 2012-2013, financed by curbs in student loan subsidies.

Senate Democrats: Similar Pell Grant provisions and more extensive program integrity initiatives; reduces direct payments to farmers by about $1 billion a year; increases government revenues by $13 billion in revenues through auctions of airwaves spectrum to cell phone service providers.

by Associated Press Jul 30, 2011



Dissecting the rival debt plans' key differences

Wednesday, July 27, 2011

Home-price index finally lines up with local reality

Data on Phoenix home prices from the monthly New York-based S&P/Case-Shiller's Home Price Index isn't usually very popular with Arizona real-estate market watchers, mostly because it lags local data and often shows much bigger declines in values than local data.

But the most recent national index, released Tuesday, appears to be closer to local data gathered from public records and the Arizona Regional Multiple Listing Service.

S&P's index shows metro Phoenix home prices were flat from April through May of this year, which is what most local data showed.


The real test for S&P is if it shows metro Phoenix home prices ticking up slightly between May and June, which they did, according to the Phoenix-based Information Market.

Building update

Permits for new homes ticked up slightly in June, according to the "Phoenix Housing Market Letter." There were 643 homes built in the region last month, compared with 589 in May.

Publishers of the report, RL Brown and Greg Burger, say that the small increase is encouraging but that the region's homebuilding market won't come roaring back until the job market recovers.

Foreclosure hub

Chicago is now the poster child for the largest inventory of foreclosures.

The Windy City takes the top spot from Phoenix, Miami and Los Angeles, all of which have carried the dubious title during most months since the foreclosure crisis hit.

According to RealtyTrac, Chicago now ranks first among the nation's 20 largest metro areas for foreclosure inventories.

Market watchers say foreclosure backlogs in courts and lenders' reluctance to modify loans are a big problem for Chicago now.

Bullish analyst

All real-estate analysts agree that more jobs are key to a recovery.

The key used to be slowing foreclosures, but that is already happening.

Michael McDonald, a real-estate consultant and stock-market analyst, is bullish on metro Phoenix's housing market.

McDonald recently wrote an article on seekingalpha.com about the region.

"There are strong indications that the long-awaited housing recovery is about to begin in the city (Phoenix) that became the poster child for homebuilding excess," he wrote.

"Careful calculations show the once-scary shadow inventory in Phoenix is no longer as large as many thought, and what remains can effectively be cleared out in about a year."

by Catherine Reagor The Arizona Republic Jul. 27, 2011 12:00 AM




Home-price index finally lines up with local reality

U.S. debt default would harm nation, individuals

Many Americans have dismissed the ongoing political brinkmanship over the federal debt limit as just another example of Washington partisan gridlock.

But the consequences of a U.S. default on its financial obligations are potentially breathtaking, from higher interest rates on car loans and credit cards to dramatic cuts in government agencies that affect every aspect of American life.

Experts warn a default on at least some of the government's bills is unavoidable if President Barack Obama and Congress can't come to terms on a deal to increase the debt ceiling before next Tuesday. Capitol Hill is in a race against the clock to find agreement on a solution.

The United States reached its statutory $14.3 trillion debt ceiling on May 16, and the Treasury Department since then has been taking what it calls "extraordinary measures" to stave off default. Starting next Tuesday, the emergency options are exhausted, and there soon won't be enough money to pay the nation's bills.

Although Treasury officials may be able to prioritize incoming revenue to satisfy bondholders, an estimated 40 to 45 percent of the government's other bills would still go unpaid, at least temporarily.

A July analysis by the Washington, D.C.-based Bipartisan Policy Center concluded that the Treasury Department will face an Aug. 3-31 cash deficit of about $134 billion. It will have only a projected $173.3 billion coming in to pay the month's $306.7 billion in expenses.

Because the government borrows roughly 40 cents for every dollar it spends, deep spending cuts are inevitable if the debt crashes into the ceiling and U.S. borrowing power is cut off.

Interest on Treasury securities, which would have to be paid to avoid default, damage to the U.S. credit rating and increased borrowing costs would consume $29 billion of the incoming August revenue, according to the center's analysis.

Although there is no guarantee that the Treasury Department would, or even has the legal authority to, pay the debt first, many analysts believe that it will.

If the roughly $100 billion in Social Security and Medicare/Medicaid obligations are met, tough choices will have to be made about how the remaining $44 billion or so is spent.

National defense, the Justice Department, including the FBI, and other vital government functions likely could not escape unscathed. The federal government shutdowns of 1995-96 would pale in comparison, experts say, because this time even mandatory spending would be affected.

Federal salaries, jobless benefits, Internal Revenue Service refunds and housing and nutrition assistance for low-income families could go unfunded in a worst-case scenario as could departments and agencies such as the Environmental Protection Agency, the Centers for Disease Control and Prevention and the Education Department.

"If the debt ceiling is not raised by August 2, we're not going to default on our debt, but we are going to default on about 50 percent of all of the other payments that the federal government is obligated to make," said Jay Powell, a former undersecretary of the Treasury for finance under President George H.W. Bush and a visiting Bipartisan Policy Center scholar who worked on the analysis.
"We have tried many examples of ways to cut 50 percent of spending, and you can't do it without eliminating many popular and important programs."

An archaic exercise?

What is the debt limit? It's not in the U.S. Constitution, and Congress' decision to put a cap on the national debt dates only to a liberty-bond bill passed during World War I. It covers both the publicly held debt and the debt owed because of government raids on the Social Security Trust Fund and similar accounts.

Lawmakers have raised the debt limit 10 times since 2001, according to an April report by the Congressional Research Service, Congress' nonpartisan research arm. There have been past debt standoffs, but in the end, Congress has never failed to lift the ceiling.

Many scholars and experts view the exercise as archaic; no other nation routinely must legislatively lift a debt limit to accommodate its budget spending. Increasing the debt limit is needed just to fund the government's ongoing operations and obligations and by itself does not authorize additional spending.

The federal government's debt ceiling is commonly compared to a credit card's limit. More precisely, it is akin to a situation where a credit-card holder has already spent to the hilt and can't afford to pay off the entire bill.

"It's actually not a bad analogy because you have some of the same risks with a credit card that you have with national debt," said Rep. David Schweikert, R-Ariz., who serves on the House Financial Services Committee, which oversees the Treasury.

"You're subject to the whims of the interest-rate market," he said. "Because, if all of a sudden, interest rates go up, your finance costs go up on your credit card just as they go up on the refinancing of our bonds. And often, you're using today's dollars to pay for last year's purchasing."

Spending decisions

Although there should still be more than enough cash coming to satisfy the nation's creditors - those who own Treasury bonds, bills and notes - there is disagreement about whether the Treasury Department actually has the legal authority to pick and choose how the incoming money is spent.

The department has said it doesn't, but the Government Accountability Office, Congress' nonpartisan watchdog agency, has said that it does.

On Tuesday, Schweikert and Sen. Pat Toomey, R-Pa., introduced legislation that would make sure the Treasury Department uses incoming dollars to cover expenses related to debt service, Social Security and the active-duty military.

Even the specter of a bond default could hurt interest rates for Treasury securities. Those interest rates are linked to the interest rates for home mortgages, car loans, credit cards and other financial instruments that American consumers and businesses rely on.

An actual default could have serious long-term ramifications, particularly as the United States continues to struggle with the after-effects of a painful recession.

"Interest rates in the whole economy could really go up," said Paul Posner, a professor at George Mason University in Virginia and a former GAO' director of federal budget and intergovernmental relations.

'Whipsaw effects'

Defaulting on government investors is not the only risk if the debt ceiling is not increased. Just slashing the flow of government spending by 40 to 45 percent could cause economic disruptions.
"This abrupt contraction would likely push us into a double-dip recession," Treasury Secretary Timothy Geithner warned in a May 13 letter to Sen. Michael Bennet, D-Colo.

Geithner was responding to Bennet's request for a Treasury Department assessment of the fiscal and economic ramifications of not raising the debt ceiling.

Posner predicted Americans would soon see just how deeply the federal government is involved in their daily lives, from air-traffic controllers to federal food inspectors. There will be "whipsaw effects that nobody could possibly have anticipated," he said.

"For example, you can't produce meat and have it go to market without an agricultural inspection. You're going to start seeing very weird things happening."

For his part, Schweikert has stayed optimistic and believes that an eleventh-hour deal can be struck.

"That's the nature of legislative bodies and also the nature of big corporate negotiations," Schweikert said. "You haggle and haggle down to the last moment, and that's when you're convinced that either you've gotten as much as you can get or have given away as much as you can give away. And then time closes the deal."

Other onlookers are not so confident. "The people who are responsible for this should not be sleeping," Posner said. "They are messing around with some really important stuff."

by Dan Nowicki The Arizona Republic Jul. 27, 2011 12:00 AM



U.S. debt default would harm nation, individuals

Tuesday, July 26, 2011

Fannie Mae Downgrades Housing Outlook. Again

Fannie Mae's Economic and Mortgage Market Analysis for July describes second quarter economic data received so far as "discouraging," and forecasts growth will likely end up at about the same anemic pace as in the first quarter, an annualized rate of 1.9 percent. While the main culprits responsible for the restrained growth are higher gasoline prices and the supply chain disruptions growing out of the cascading disasters following the Japan earthquake, the tepid housing recovery is another reason for the modest pace of economic growth.

"During the two years of the current economic expansion, residential investment has yet to make a contribution to economic growth, the Analysis states." This is unlike other recessions when typically by this point in the recovery housing has added significantly to growth.

The current state of the housing market remains downbeat. Sales of existing homes hit the lowest point in seven months in May and new home sales dipped again after two straight months of growth. One bright spot mentioned in the report was a surge of 8.2 percent in pending home sales in May. However, as we reported here last week, the National Association of Realtors blamed cancellation of many of those contracts, possibly due to financing difficulties, for the further drop in sales of existing homes in June. Another positive is the share of home sales attributable to distressed sales which means less downwardly distorting pressure on home prices from the distressed sale discounts. Consequently median home prices in non-distressed have begun to rise. Fannie Mae economists view this as a seasonal phenomenon, however, and project further deterioration of home prices, perhaps to new lows, when the summer market ends.

Within the new home market supply and demand conditions have become more balanced with a further drop taking the inventory to a record low in May. The inventory-sales ratio (the number of months to deplete the existing inventory at the current pace of sales) is now at 6.2 months, matching its long-term average. Existing homes however are still weighted heavily on the supply side with large numbers of delinquent mortgages creating a shadow inventory of houses. Because of the widely publicized problems with foreclosure processes that emerged in the fall, the time for working through the excess supply and the shadow inventory has increased and will further delay the recovery of the housing market.

Fannie Mae has downgraded its housing outlook for the remainder of the year. Single family housing starts are expected to total 440,000 this year, a 7 percent decline from the 471,000 starts in 2010. This is a downward revision of 20,000 starts since last month's analysis. Projections for starts in 2012 have also been downgraded from 671,000 to 646,000 since the June Analysis.The company's housing survey for June showed a marked deterioration in consumers' expectations of home prices over the next year and is just another piece of survey data showing that consumers remain reluctant to take on large debt.

Home prices are expected to decline further this year and next. The median price in 2010 for a new home was $221,800. This year it is expected to be $216,900 and in 2012 $214,100. Existing homes are expected to sell for a median price of $165,600 this year and $163,700 next, compared to $173,000 in 2010.

Mortgage interest rates will move up just slightly over the year to finish at 4.7 percent and rise again in 2012 to an average of 5 percent. Total mortgage originations in 2011 will decline to $1.07 trillion from $1.51 trillion in 2010 and decline further still next year to $999 billion. Single family mortgage dept will fall an additional 2.6 percent from $10.54 trillion to $10.26 trillion.

The report also points to the vulnerability of the banking sector to mortgage-related risk. Recently the Federal Reserve began to auction off low-quality mortgage-related assets associated with its take-over of AIG. The auctions did not go well and severely disrupted the private label market and caused market participants to mark down asset values on banks' balance sheets. The program has been suspended.

Overall, Fannie Mae's economists do not expect a "quick snap-back" in activity. Among the positives mentioned in the report was a rebound in auto production following the aforementioned supply chain disruptions and strong durable goods report and capital goods orders. However, there was a surprisingly week report on consumer spending and labor market data including employment reports and earnings reports were what Fannie Mae termed "a bust."

by Jann Swanson Mortgage News Daily Jul 25, 2011


Fannie Mae Downgrades Housing Outlook. Again

Sunday, July 24, 2011

Can Brian Moynihan fix America's biggest bank? - The Term Sheet: Fortune's deals blog Term Sheet

With its damaged reputation and huge mortgage losses, Bank of America is still reeling from the financial crisis. But CEO Brian Moynihan may be the right guy to turn things around.

In late June, Moynihan rocked Wall Street by announcing an $8.5 billion landmark settlement that should help BofA finally begin moving past the home loan mess.

FORTUNE -- It's hard to think of a company that emerged from the financial crisis more despised than Bank of America. Sure, Goldman Sachs gets pilloried as a symbol of Wall Street greed and excess. But when you count up the various constituencies that have a beef with BofA -- homeowners, consumers, investors, regulators -- it's really no contest. The infamous 2008 acquisition of mortgage giant Countrywide saddled America's biggest bank with the largest, most toxic portfolio of home loans in the business, as well as an ongoing public relations nightmare. Due in large part to its mortgage woes, Bank of America's (BAC) stock remains some 80% off its pre-crisis high of $55. In the minds of many, BofA epitomizes the sorry state of the whole damaged U.S. economy.

In his first 17 months on the job, Bank of America CEO Brian Moynihan did little to dispel that image -- or to win the confidence of Wall Street. Since Moynihan replaced the much-criticized Ken Lewis at the beginning of 2010, BofA's mortgage losses have ballooned, and nervous shareholders have bailed en masse. A few embarrassing public gaffes only made things worse. The 51-year-old Moynihan was widely seen as a charisma-challenged plodder, fumbling the biggest salvage operation in financial services.

Then, in late June, Moynihan rocked Wall Street by unveiling a landmark settlement that takes a giant step toward finally putting the home loan mess behind Bank of America. Moynihan announced that BofA will pay $8.5 billion to 22 big investors -- from BlackRock (BLK) (to the Federal Reserve Bank of New York -- which claimed that Countrywide had misrepresented the quality of loans it sold them. In a single stroke, he effectively removed the biggest cloud over the company's future. The deal is so comprehensive, covering all of Countrywide's disputed mortgages sold to private investors, that it should serve as a model for the rest of the industry and a bullish sign for the broader economy. It may be the single best headline in financial services since the credit crisis began. "It's a win on the board that Brian Moynihan needed," says Credit Agricole analyst Mike Mayo, a famously tough critic of the big banks. "The challenge is to ensure that the momentum continues."

The victory shows that Moynihan has been vastly underrated. In part, that's because of his rough-around-the-edges personality. The workaholic Providence lawyer turned hard-core banking brainiac won't win any awards for public speaking, and he isn't inclined toward public relations. But a close look at his career reveals that he's proven his mettle for two decades as a dealmaker, team builder, and crisis manager. And he is perhaps uniquely suited for the job of chief executive in today's banking world. The business is now so complicated and so fraught with hidden dangers lodged in such esoteric products, that the best leaders are those who are totally immersed in the data and details -- the ones who serve as their own risk managers. That's Moynihan.

Best of all, Moynihan is the architect of a radical blueprint his rivals would be wise to follow. In effect, he wants to turn back the clock, to run Bank of America the way banks were managed before the industry -- led by BofA -- embraced a strategy of growth at all costs. His goal is to avoid the chronic cycle of making lots of money in good times, then handing it all back in a downturn. It's something few banks have ever accomplished. "He's dead right," says Gene Lockhart, former chief of retail banking at BofA and now a senior adviser at Berenson & Co. "His strategy is the polar opposite of the way BofA was run for many years."

Moynihan is pledging that this approach will make Bank of America into one of the most profitable companies on the planet. In March, at a presentation to investors in the baroque ballroom of New York's Plaza Hotel, Moynihan unveiled his audacious goal of earning as much as $40 billion before taxes by the middle of the decade. That translates into $25 billion in net income, far more than any non-oil company in America made in 2010. One of America's best value investors is betting big that Moynihan will deliver. Bruce Berkowitz, whose $15 billion Fairholme Fund (FAIRX) has returned more than 11% annually over the past 10 years, owns a $1.2 billion stake in BofA. That position has hurt his recent performance, but he believes the stock will be a long-term winner. "Moynihan has the right strategy of staying away from consumer loans that blow up in a bad market," Berkowitz tells Fortune. "Bank of America will show tremendous earnings power."


There's a lot to like about BofA. It ranks as the largest U.S. bank, with nearly $2.3 trillion in assets. And it boasts more market-leading franchises than any player in financial services. BofA has the biggest retail business, with $410 billion in deposits and 5,800 branches from California to Maine; it owns the premier wealth management platform in Merrill Lynch and U.S. Trust; and it stands just behind J.P. Morgan Chase (JPM) as the world's second-largest investment bank.

Those healthy businesses show so much muscle that they should be able to propel Bank of America past the mortgage crisis, especially since we now know the approximate size of it. The losses so far have been staggering: From the beginning of 2008 through the first quarter of 2011, Bank of America's home loan business lost a stupendous $46 billion. It will lose another $20.6 billion in the second quarter of this year, chiefly because of the settlement. That gargantuan hit will leave the bank with an overall loss of around $2 billion for 2011. But analysts now predict it could earn as much as $15 billion next year. (It booked $20 billion in profits at its peak in 2007.)

The mortgage settlement has two huge effects for BofA. The first is that it allays fears that BofA will need to raise fresh capital in the future by selling new stock at very low share prices and dilute its shareholders -- just the problem that soured investors on the stock during the crisis. Second, putting a firm number on the losses makes it far more likely that Moynihan can deliver on his promise to deliver truly epic earnings. If he can pull it off, it will go down as one of the great turnarounds in banking history.

"His mind is always outracing his mouth"

At a height of 1,200 feet, the Bank of America Tower on 42nd Street in Midtown Manhattan is the second-tallest skyscraper in New York, after the Empire State Building. Completed in 2009 at a cost of around $1 billion, it has been widely recognized as one of the world's most environmentally friendly buildings, with state-of-the-art features that include a system to capture rainwater, purify it, and reuse it. Moynihan typically spends a day or two each week working in the building, splitting the rest of his time between BofA's heaquarters in Charlotte and its office in Boston, where he lives.

During a wide-ranging interview recently in his 50th-floor office, which has slanted, floor-to-ceiling windows with breathtaking views of lower Manhattan, Moynihan explained his plan to remake the bank. He detailed his two-part strategy for first building a bulwark of capital, then delivering all earnings to shareholders. He also addressed the most embarrassing incident of his tenure so far.

Last December, Moynihan began telling Wall Street that his company would apply to the Federal Reserve -- which is still closely monitoring the capital levels of the big banks -- for permission to increase its dividend in the second half of 2011. On March 23, however, BofA disclosed that the Fed had rejected the proposal. Analysts speculated that the Fed said no because BofA's mortgage losses could leave it short of capital. Chuck Noski, who'd been CFO for less than a year, announced he would step down in June. Moynihan explained that Noski was reassigned because of a relative's ill health, not because of the dividend mix-up. Still, the incident made Moynihan look bad. Moynihan calls the episode a temporary setback and says the Fed's rejection had nothing to do with mortgages. "It happened because we hadn't fully integrated the risk systems of Merrill Lynch and BofA," he told Fortune. "Once that work is finished, we will apply again for the dividend increase."

Conversing with Moynihan is no easy task. He tends to fire off sentences in machine-gun-like bursts, without anything resembling a pause for punctuation. Words like "litigation" and "putback risk" run together into a verbal blur. For an executive with such clear ideas, he can be almost impossible to understand at times. "His mind is always outracing his mouth," says Jay Sarles, a former top executive at Fleet and BofA.

In appearance, the redheaded Moynihan recalls a shorter, stockier, and less mirthful version of Conan O'Brien. At work, he practically radiates intensity. "He's not the cuddliest guy in the world," says BofA director and former Fleet CEO Chad Gifford. On trips, the perpetually disheveled executive carries two canvas shoulder bags packed with papers. In meetings, if an underling starts to defend an investment that Moynihan has decided to exit, he'll snap dismissively, "I've heard enough stories." About the only time he engages in small talk is if the topic is the Boston Red Sox or the virtues of Irish executives. "In their own minds, the Irish always think they're in charge," he quips, before resuming his just-the-facts demeanor.

Moynihan landed the CEO job during a secret interview at the Four Seasons hotel in New York City in November 2009 by promising the board's search committee that he would follow a rigid set of principles: Sell virtually every asset unrelated to bedrock banking. Forget all acquisitions, now and forever. Don't grow total loans, but do change the mix so BofA won't be overexposed to risky consumer credit in a bad cycle.

In effect, Moynihan was repudiating the go-for-growth culture that reigned under Lewis. "We got in trouble trying to grow far faster than GDP," he warned the directors. "Our goal should be to grow with the economy and the customers we have now, not take a lot of risk chasing new ones." Never again, he swore, would BofA need to sell stock in a downturn to survive. To the board, Moynihan's plan was far more than a knee-jerk reaction to the crisis. It struck them as a better way to run a bank, period. "Brian wants to level out the peaks and valleys, so that we won't get hit in a downturn as in the past," says director Thomas Ryan, the retired chairman of CVS Caremark (CVS).

In explaining his current strategy, Moynihan divides the future into two main periods. Over the next two years, he says, Bank of America will retain virtually all its earnings to build the funds necessary to comply with the new Basel III international standards of capital requirements for financial institutions, which are anticipated to be stringent. He adamantly insists that during this period, BofA's earnings power makes the crunch scenarios that critics fear impossible. "To say we have to raise capital is wrong," he says. "We'll generate all we need from our own earnings."

When BofA has built up a sufficient capital cushion, probably two to three years from now, Moynihan plans to return all earnings to investors in dividends or share buybacks -- we're talking about $25 billion a year, all stuffing shareholders' pockets. "We need to get back most of the shares we issued in the crisis, that caused all the dilution," says Moynihan. It's a classic value strategy of growing modestly without plowing profits back into the business.

A rugby player in college, Moynihan made his reputation as a hard-nosed dealmaker at Fleet. He plans to grow BofA by being more customer-friendly.

Moynihan's goal is to expand revenues just one percentage point faster than GDP. The total lending book will remain at around $1 trillion, but the CEO is radically reducing exposure to risky areas, especially credit cards. "In the boom we pushed cards through the branches and in mass mailings," he says. "To drive growth we gave cards to people who couldn't afford them." Moynihan has already shrunk the card loan portfolio from $250 billion to $170 billion, and it's going still lower.

The new mantra is to grow by providing more services to today's customers. Indeed, BofA hasn't stopped lending. It's using the money freed from lowering the credit card portfolio, and selling billions of dollars in auto loans bought from GMAC as an investment, to make carefully underwritten mortgages to loyal customers and provide more safe, lucrative lines of credit to corporate clients.

Moynihan also aims to make the retail experience more customer-friendly, free of hidden "gotcha" fees that make people hate their banks. A crucial move is his decision on debit card fees. For years the big banks have been reaping billions of dollars by charging overdraft fees to customers who buy a cup of coffee or a dress with their debit card without a sufficient balance to cover the charge. Last year Congress enacted legislation requiring banks to ask customers if they'd accept or decline being allowed to overdraw their accounts. If customers chose to "opt in," banks could keep charging the fat fees.

Virtually all of the big banks, including J.P. Morgan Chase and Wells Fargo (WFC), gave customers the choice to opt in, and are still charging overdraft fees for folks who said yes. BofA is the rebel. Moynihan eliminated debit card overdrafts on purchases. That gambit erased $1 billion a year in revenues and astounded the competition. It's all part of a campaign to nurture long-lasting relationships with customers. "We can't be the biggest bank in America and have people thinking we're taking advantage of them," he says.

From busboy to banker

Moynihan grew up in Marietta, Ohio, a town of 14,000 in the southeastern part of the state, the sixth of eight children in a middle-class Irish Catholic clan. His father was a chemist for DuPont (DD) and his mother sold insurance. Brian wore all the Christmas sweaters passed down from his three older brothers. As a teenager he worked as a busboy at a Ponderosa steakhouse, dug ditches for sewer projects, and manned the afternoon shift at a plant that made industrial magnets.

At Brown University, Moynihan majored in history and met his future wife, Susan; the couple have three children. He also played rugby, a sport that allows for no helmets or padding. As the fly-half, the player who directs the attack, Moynihan proved skilled at picking in a nanosecond just the play to flummox the defense. "He was a fiery, physical player, a real guy's guy," his coach, Jay Fluck, remembers. At Notre Dame Law School, Moynihan ran the snack bar, stirring the spaghetti pot and serving coffee.

Returning to Providence, Moynihan joined the law firm Edwards & Angell in 1984. He soon began working on mergers for a Providence bank called Fleet Financial, a midget that harbored gigantic ambitions. Its CEO, Terry Murray, would eventually create FleetBoston by buying most of the major banks in the region, with Moynihan as his chief dealmaker. Moynihan, still a lawyer, first impressed Murray during the purchase of the failed Bank of New England from the FDIC in 1991. It was the deal that made Fleet a major force. Moynihan's creativity, and work ethic, astounded Murray. "At 11 p.m., I'd tell the investment bankers to model the effect on earnings if we paid different prices, with Brian in the room," says Murray. "The next morning at 8 a.m., he'd have the entire model ready showing the dilution or accretion, depending on the price, before the bankers even arrived."

In 1993, Murray hired Moynihan, and the pair formed a mentor-student relationship, reminiscent of the rapport between the creators of Citigroup (C), Sandy Weill and Jamie Dimon. Murray reveled in his rugged upbringing in a "triple decker" -- a three story, working-class apartment house. He prided himself on playing the underdog from a tiny bank in a tiny state, with the guts to steal the mantle of banking from the aristocrats in Boston. A consummate storyteller, the flamboyant Murray couldn't have been more different from his slogging protégé.

But Murray and Moynihan shared the same philosophy on making deals. They concentrated on extremely complex transactions, and they liked to pay cash. The reason was simple: The tangled deals scared off other potential bidders, allowing Fleet to buy on the cheap. Mike Lyons, who now heads strategy at BofA, worked on Moynihan's team for two years in the mid-1990s. "Brian would use a strategy we called 'hanging around the hoop,' " says Lyons. He'd make a low-ball offer on a complex deal and wait while all the other bidders dropped out, then low-ball again. That strategy worked brilliantly with the purchase of NatWest's U.S. business in late 1995. The ailing British bank's investment bankers, Goldman Sachs (GS), handed Moynihan a letter with the asking price. Moynihan whipped out a pen, crossed it out, and wrote in a drastically lower number. He got his price.

After completing an acquisition, Moynihan and his team would swoop down on the credit card unit or broker, analyze the business, then decide which parts of it to sell, grow, and fix. Recalls Lyons: "Brian would examine every asset, including securities, land, buildings. He'd do an assessment of what it's worth and what we should do with it."

The crowning deal for Murray and Moynihan was Fleet's $16 billion acquisition of BankBoston in 1999. It was a landmark moment in New England. BankBoston, founded in 1784, had dominated banking in the region for decades. Once again, it was Moynihan who turned a complex twist to Fleet's advantage. The Justice Department required that Fleet sell 280 branches in New England. Strong buyers lined up, including Chase and RBS Citizens. But Murray and Moynihan wanted to keep powerful rivals out of their territory. "The point was to find absolutely the worst operator possible," says an investment banker whose client wanted to buy the Fleet branches. Moynihan arranged to sell them to a weakling, Sovereign Bank. FleetBoston quickly won back old customers from Sovereign.

Surviving shakeups

Fleet's run came to an abrupt end in 2004 when it was acquired by Ken Lewis and Bank of America. Moynihan was one of the few top executives to make the transition to BofA. But Lewis was slow to give him major responsibility. Moynihan's break came in late 2007, when the investment bank suffered big trading losses, and Lewis picked him as the fixer. He restored profits by cutting 18% of the workforce and selling an underperforming unit. But any chance that Moynihan might succeed Lewis -- clearly his ambition -- seemed to disappear when BofA signed the Merrill Lynch deal in mid-September of 2008. Lewis announced that Merrill CEO John Thain would head both investment banking and brokerage.


Lewis offered Moynihan a job running the credit card division in Wilmington. Moynihan refused. For Lewis -- who declined to be interviewed for this story -- shunning an assignment at BofA was a fatal breach. When his old boss Hugh McColl would order Lewis to Texas or Florida, Lewis would famously hop on a plane that day. On Dec. 8, 2008, Lewis informed the board that Moynihan was departing. The headline on the prewritten press release stated, "Brian Moynihan Leaving the Company."

But the three directors from FleetBoston demanded that Lewis reverse his decision and keep Moynihan. Lewis, already weakened by big losses at Merrill, relented. Lewis named Moynihan, who hadn't practiced law in 15 years, as general counsel, a job he held for less than a month.

On Jan. 4, 2009, with Merrill Lynch in serious trouble, Lewis abruptly fired Thain and once again installed Moynihan to lead investment banking and brokerage. "We were getting horrible press, and lot of key people were leaving," recalls Michael Rubinoff, a top executive in BofA's investment bank. The stock had collapsed to $3 a share. Merrill bankers were scared that BofA wouldn't pay large bonuses, the lifeblood of Wall Street. Moynihan assured the troops that BofA was determined to build a great investment bank and would pay competitive bonuses for 2009. He also ordered generous payments to retain Merrill brokers. The exodus slowed, and by the second quarter the investment bank was solidly profitable.

On Sept. 28, 2009, Lewis announced he would resign by year-end. As a successor, Lewis initially backed not Moynihan but his own chief dealmaker, Greg Curl. "He found Brian useful but not CEO material," says a former top executive. But the former FleetBoston directors threw their support behind Moynihan. They got an assist from his mentor, Terry Murray, who called big institutional investors to champion Moynihan. "I called as a large shareholder," says Murray, now 72. "I said he was by far the best choice. He understood this large and complicated company where it would have taken an outsider a year to get a grip on the problems."

The Countrywide hangover

Moynihan will ultimately be judged on his success at quickly and decisively resolving the gigantic burden in mortgages. Though the settlement in June was expensive, it demonstrated that future home loan losses should prove far lower than many on Wall Street feared. Most of all, it clears a dense fog of uncertainty. "This is the first time investors have been able to fully grasp the extent of the future losses since the issue surfaced last year," says analyst John McDonald of Sanford C. Bernstein.

Here's why fraudulently underwritten loans posed such a towering, and until now unpredictable, problem. From 2004 to 2008, Countrywide originated $424 billion in mortgages that it sold to private investors, usually after packaging the loans into securities. Those mortgages ranked among the riskiest exotic products sold in the housing bubble. Countrywide clearly figured that it would never see those loans again. But Countrywide's contracts with its investors made it clear that if Countrywide misrepresented facts about properties or the owners, the investors could force the lender to take the loans back at full value. When BofA bought Countrywide, it took on that liability.

The issue of these boomeranging mortgages, or "put-backs," arose last October when a Texas law firm wrote to BofA on behalf of a dozen large investors, alleging that loans they had bought from Countrywide were in breach of contract. Moynihan recognized that the group accounted for just a fraction of the loans that Countrywide had sold to private funds. He didn't want to negotiate settlement agreements one at a time that would leave shareholders uncertain of the total cost. Instead he sought a comprehensive deal that would resolve all of the Countrywide private-label put-back liability in one agreement.

To reach that universal deal, Moynihan needed the approval of both the investors and the trustees responsible for ensuring that the bondholders received their payments. Fortunately for BofA, a single trustee, Bank of New York Mellon, represented virtually all of the Countrywide investors. That presented an opportunity for the seasoned dealmaker. Moynihan recognized that the sole trustee made a broad settlement reachable. After months of pressing, he got Bank of New York Mellon to recommend the terms of a settlement for all the investors in those securities.

BofA still faces two problem areas in home loans. First, BofA holds $408 billion in mortgages on its balance sheet. That's 19% of all home loans owned by America's banks. Fortunately, the rate of defaults has been declining since it peaked in late 2008. McDonald of Sanford C. Bernstein projects that if that figure keeps falling, as he expects, BofA is about three-fourths of the way through its total losses. The second issue is that Bank of America is the largest mortgage servicer in the country, with 14 million loans outstanding. Today, 1.5 million of those mortgages are over 60 days past due. To deal with this avalanche of defaults, BofA has hired an additional 20,000 employees to arrange short sales, file legal documents, or sell houses the bank owns through foreclosure. Moynihan pledges to dispatch half the delinquent loans within two years. It's another big goal Wall Street will be watching. If he succeeds, BofA will substantially lower its operating costs, a crucial part of Moynihan's recovery plan.

For those who despise it, Bank of America is a symbol of unfulfilled promise and promises. No one is promising bigger than Moynihan. But don't underestimate his chances of delivering.

by Shawn Tully Fortune Magazine Jul 7, 2011


Can Brian Moynihan fix America's biggest bank? - The Term Sheet: Fortune's deals blog Term Sheet

Surprise! The big bad bailout is paying off

FORTUNE -- The bailout of the financial system is roughly as popular as Wall Street bonuses, the federal budget deficit, or LeBron James in a Cleveland sports bar. You hear over and over that the bailout was a disaster, it cost taxpayers a fortune, we didn't really need it, it didn't work, it was a failure. It has become politically toxic, which inhibits reasoned public discussion about it.

But you know what? The bailout, by the numbers, clearly did work. Not only did it forestall a worldwide financial meltdown, but a Fortune analysis shows that U.S. taxpayers are coming out ahead on it -- by at least $40 billion, and possibly by as much as $100 billion eventually. This is our count for the entire bailout, not just the 3% represented by the massively unpopular Troubled Asset Relief Program. Yes, that's right -- TARP is only about 3% of the bailout, even though it gets about 97% of the attention.

A key reason for the rescue's profitability is that the Federal Reserve System has already turned over more than $100 billion of bailout-related income to the Treasury, and is on track to turn over $85 billion more this year and next. That's not something most people include in their math. On the negative side, we're including what may be the first overall cost calculation of a special tax break that's worth tens of billions of dollars to four big bailout recipients. And, of course, we've analyzed reports from the Congressional Budget Office, the Treasury, the Federal Deposit Insurance Corp., and other sources.

We'll get to the detailed numbers in a bit. But for now, we'd like to remind you why the bailout exists. The revisionist idea that the bailout is the problem -- rather than excesses in the financial system -- is simply stunning to those of us who watched the financial crisis surface in 2007, when two Bear Stearns hedge funds speculating in mortgage securities collapsed, and reach a crescendo in September 2008, when Lehman Brothers went bankrupt. Many in the financial world applauded Washington's decision to let Lehman go under -- but that applause was quickly replaced by fear as unanticipated consequences of the bankruptcy surfaced.

Lehman's collapse touched off a terrifying run on money market mutual funds when the Reserve Primary Fund announced it could pay holders only 97¢ on the dollar because of Lehman-related losses. Savers who'd considered money funds as safe as federally insured bank deposits stampeded for the exits, pulling out hundreds of billions of dollars. It took federal guarantees of more than $3 trillion of money market fund balances -- bailout! -- to stop this modern-day bank run.

Some hedge funds that used Lehman's London office as their "prime broker" had their assets frozen, setting off a run on prime brokers Goldman Sachs (GS) and Morgan Stanley (MS) as U.S. hedge funds pulled out their assets to avoid getting frozen if either firm failed. Goldman and Morgan were close to running out of cash when the government saved them by making them bank companies with access to the Fed's lending facilities. Bailout! Bailout! GE Capital (GE) was having trouble rolling over its borrowings, and was rescued by a government guarantee program. Bailout! Then there was American International Group, the now infamous AIG (AIG), which required a 12-figure rescue.

Had Goldman, Morgan Stanley, GE Capital, AIG, and several giant European banks not gotten bailouts and instead failed, even capital-rich J.P. Morgan Chase (JPM) would have gone under, because it wouldn't have been able to collect what these and other players owed it. There would have been trillions in losses, worldwide panic, missed payrolls, and quite likely the onset of Great Depression II. That's why we needed a bailout. And why we got it.

Now that we've relived the history, let's take a stroll through the numbers. Things have turned out far better than expected because the massive government intervention calmed the markets, and Uncle Sam had to make good on only a tiny fraction of the obligations that taxpayers guaranteed. Uncle Sam bought assets at what turned out to be near-bottom prices amid the market panic; the value of Sam's holdings has since soared. The more than $14 trillion of government investments, securities purchases, and loan guarantees -- of which TARP never amounted to more than $411 billion (although it was authorized to spend up to $700 billion) -- stabilized the whole financial system.

So how has this worked out for U.S. taxpayers?

Let's take the costs first.

· The biggest expense by far comes from the rescue of mortgage finance giants Fannie Mae and Freddie Mac. Or, actually, the rescue of their debtholders -- stockholders have been essentially wiped out.

The $130 billion cost is the money the government has put into Fannie and Freddie ($154 billion) to cover their losses, less the dividends ($24 billion) Fannie and Freddie have paid on the government's preferred stock. The Treasury and the nonpartisan Congressional Budget Office both expect that $130 billion figure to shrink; Fannie and Freddie have been adding profitable business since 2008, and it should begin to outweigh their losses from the housing bubble. But we're being conservative and counting the full $130 billion.

· Then there's a $35 billion tax expense, which no one else has included in bailout calculations. It's our analysis (with assistance from tax guru Bob Willens) of the taxpayer cost of special IRS rulings that allowed TARP recipients AIG, Citigroup, (C) General Motors, (GM) and Ally Financial (formerly GMAC) to use their tax losses in full, rather than being subject to "change in control" rules designed to stop companies from being taken over for their tax losses. GM got both an IRS ruling and a provision in the 2008 economic stimulus legislation to preserve its losses despite having gone bankrupt.

We estimate that without special treatment, the companies could have used only about $4 billion of their $43 billion of "deferred tax assets" to offset federal income taxes. Now they can use them all. We're estimating the taxpayer cost at $35 billion rather than the full $39 billion because it's not clear when -- or whether -- the companies will earn enough to use all the losses. (The tax breaks have presumably increased the prices of the shares in those companies that the government owns or has sold, because they have made the companies more valuable to investors. That means the higher share prices have decreased the cost of the bailout, though it's impossible to quantify by how much.)

· We're counting the cost of TARP as $19 billion, based on the most recent update by the Congressional Budget Office. That includes $13 billion spent to help homeowners restructure their mortgages, plus projected losses on AIG, GM, and Chrysler, offset by gains in some of TARP's other holdings, primarily in banks. The $19 billion estimate is a big improvement from the CBO's first estimate, $189 billion, in January 2009. That's because TARP's investments have fared better than expected, and its total outlays have been shrinking rapidly. They're down to $104 billion, according to the Treasury, from their aforementioned high of $411 billion.

The plus side

· The biggest and most surprising numbers are the bailout-related profits that the Federal Reserve has turned over to the Treasury, and that we expect it to turn over this year and next.

We're counting these payments as an offset to the bailout's cost because they stem from the Fed's bailout activities. The Fed's increased profits come primarily from income on the $1.25 trillion of mortgage-backed securities it bought in 2008–09 to stabilize credit markets (Quantitative Easing 1), and the $600 billion of Treasury securities it bought in 2010–11 (QE2) to hold down interest rates and raise asset values. Even though QE2 is usually considered "economic stimulus," we're treating it as part of the bailout because rising asset values have helped stabilize the financial system.

The Fed now owns almost $2 trillion more of securities than it did before financial problems surfaced in 2007. A normal financial institution would have had to borrow heavily to add $2 trillion of assets, and interest on that borrowed money would have offset most or all of the income from the added assets. The Fed, though, doesn't have to borrow: It effectively creates money (which has its own problems) to buy the securities. So the Fed's income on its added securities is pure profit.

Each year the Fed turns over most of its annual profit to the Treasury. It's money that the Treasury can spend, and it reduces the federal budget deficit. From 2007 (when the Fed began expanding its balance sheet to combat financial instability) through 2010, the Fed sent a total of $193 billion to the Treasury. In the previous four years it sent the Treasury only $91 billion. We're counting that $102 billion difference as bailout-related profit.

· Most Fed analysts expect the size of the Fed's securities portfolio (and hence its profits) to fall slowly, if at all, this year and next. So we're estimating that the Fed will send $55 billion of bailout-related profits to the Treasury this year, about what it sent in 2010. To be conservative, we're estimating the 2012 bailout profit at only $30 billion.

· The Treasury owns 563 million shares of AIG that it got from the Fed, which extracted them from the insurance giant in 2008 in return for making $85 billion of credit available. Even though AIG was a big TARP recipient, this holding, currently worth about $16 billion, isn't included in TARP's profit-and-loss statement. That's why we're including it here.

· The Treasury says it has made a total of $15 billion from fees for insuring money fund balances, and from the $150 billion of mortgage-backed securities that it owns.

· We estimate that the FDIC has made $8 billion from the difference between the fees it has charged to guarantee borrowings and the losses it has incurred on those guarantees. The FDIC declined to give us a number because some of the guarantees are still outstanding.

Bottom line

Our accounting is unconventional because in some places we count what has happened, in some places we project what's likely to happen, and in some places we've done our own numbers because no others exist. If things break right, taxpayers could come out $100 billion ahead: our $42 billion profit estimate, plus a $25 billion reduction in the Fannie/Freddie cost, $25 billion more in Fed profits, and a reduction in the $19 billion expense we're showing for TARP.

We don't expect any of what we've told you to make the bailout popular -- we're not wild about it ourselves for the same reasons many people dislike it. The government was picking winners and losers. Big Government bailed out Big Finance while letting average taxpayers lose their homes. Creditors of bank companies and AIG got far too good a deal at taxpayer expense. Wall Street is back to paying enormous bonuses (and whining about being demonized), while average Americans, whose tax dollars saved the Street, are still suffering. And, of course, the economy is down 7 million jobs from its peak in 2007.

But something needed to be done when the financial world was on the brink of the abyss, and the government did something. No matter what your views are, you should be happy that taxpayers, almost miraculously, are coming out ahead rather than hundreds of billions of dollars behind.

When our boss assigned us to find out how much the financial rescue cost, we expected to find a monumental loss, because Fannie Mae and Freddie Mac seemed like a bottomless pit. Instead, we discovered that bailout profit payments from the Fed -- which we hadn't previously thought of as a profit center -- are virtually certain to exceed taxpayer losses on Fannie and Freddie. We were surprised -- and pleased -- to discover taxpayers showing a profit on the bailout. We hope that you are too.

by Allan Sloan Fortune Magazine Jul 8, 2011


Surprise! The big bad bailout is paying off

Phoenix-area homebuilders adjust to market

A deep plunge in both home foreclosures and pre-foreclosure notices in the second quarter ultimately could lead to a boost in business for Phoenix-area homebuilders, who have settled into a slow-but-steady sales pattern during the past two years.

However, builders and analysts said there were several other hurdles to be negotiated before the homebuilding industry could experience anything resembling a recovery.

Those challenges include the inability of many prospective buyers to obtain financing, lack of buyer confidence in the economy's future, a growing shortage of skilled labor in the homebuilding sector and continued stagnation in the Phoenix-area job market.

Executives at locally active builders, including Shea Homes, Taylor Morrison and Robson Communities said they had scaled back costs and are prepared financially to endure the remainder of the foreclosure era.

The builders said they did not expect to see a meaningful increase in sales for at least another year.

Still, they pointed to a number of positive trends that could turn out to be the seeds of a future uptick in new-home sales.

Those trends include the growing number of Baby Boomers reaching retirement age, increased foot traffic at new-home sales offices in the Phoenix area and a mild price recovery under way in the existing-home market.

Maricopa County home foreclosures decreased significantly in the second quarter, shrinking from 15,831 transactions in the second quarter of 2010 to 10,875 transactions, according to Mesa-based real-estate market research firm Ion Data.

Likewise, notices of coming foreclosure decreased from 19,664 notices in the second quarter of 2010 to 13,311 notices, Ion Data analyst Zach Bowers said.

It's not clear whether the lower numbers signify a decrease in unsustainable home loans or mortgage lenders taking a moment to catch their breath, analysts said.

Even if the drop in foreclosures continued, it still would be a long time before area builders felt the positive effects, said Jim Belfiore, a Phoenix-based analyst who covers the homebuilding industry.

"The foreclosure numbers are just so high," said Belfiore, president of Belfiore Real Estate Consulting. "We would need them to go down by 50 percent, and it's just not going to happen overnight.

"We still have 100,000 foreclosures to go, in my opinion."

There were 4,000 new-home permits issued in Maricopa County in the first quarter, down about 10 percent from 4,546 permits during the same period a year earlier, according to the most recent data available from the realty-studies program at Arizona State University's W.P. Carey School of Business.

Home-construction activity remained slow in the second quarter, commensurate with the lower sales volume that builders have experienced, said Pierrette Tierney, vice president of sales and marketing for Scottsdale-based homebuilder Taylor Morrison.

"Permits are down, but it's necessary to balance out the supply-and-demand scale," Tierney said.

Still, Tierney and other builders said sales per subdivision were tracking almost identically with 2010 figures, and that the year-over-year drop in sales is due primarily to the closing out of several subdivisions in 2010.

Belfiore confirmed that assessment, saying that average sales per subdivision in the second quarter was 1.7 homes, exactly what it had been during the same period of 2010.

The consistency of sales per subdivision belies a significant boost in foot traffic inside home-sales offices and model homes, which Belfiore described as both a blessing and a curse.

The good news, he said, was that the average number of potential buying parties per subdivision per week reached its highest level in three years during the second quarter.

The bad news is that as many as half of those interested buyers were denied a mortgage loan, Belfiore said.

"Thirty percent to 50 percent of the people who want a new home don't qualify for financing at this time," he said.

Ed Robson, founder and chairman of Sun Lakes-based Robson Communities, said financing had not been a problem for buyers approaching retirement age, the demographic on which Robson focuses most heavily.

The company's sales have remained steady this year compared with 2010 and are up 16 percent from 2008. Robson said Baby Boomers' lack of confidence in the country's economic future had been the primary factor preventing home sales in the age-restricted market.

Another problem Robson Communities has run into lately is a shortage of skilled labor, he said.

Robson said community rebuilding efforts in regions torn apart by floods or tornadoes have lured away many of the state's best contractors, some of whom were struggling in Arizona due to a lack of steady work.

Still, Robson said there was reason for homebuilders in the "active-adult lifestyle" market to be optimistic.

Their target audience, adults age 45 to 64, has swelled to more than 81 million, compared with just over 31 million in 2000.

Ken Peterson, Arizona vice president of sales and marketing for Walnut, Calif.-based Shea Homes, said recent home sales inside the company's Trilogy active-adult communities had outpaced sales in Shea's family-oriented neighborhoods.

But in general, Peterson said, homebuilders in the age-restricted market were no closer to a boom-era renaissance than those selling to buyers of all ages.

Builders and analysts said the key to surviving the next year or two was not some magic bullet but a constant effort to be more efficient, resourceful and responsive to market changes. Eventually, they believe, things will get better.

Robson, whose Sun Lakes development is one of the largest active-adult communities in the state, said there always will be people who want to buy a home and settle down in Arizona.

"We've got the sun and the weather," he said. "Where else are people going to go?"

by J. Craig Anderson The Arizona Republic Jul. 24, 2011 12:00 AM




Phoenix-area homebuilders adjust to market

Savings Bonds' shift to digital-only marks end of era

Old-timers might call it the end of an era. Youngsters won't care.

But U.S. Savings Bonds, which have endured for more than 75 years and played a notable role in winning World War II, soon will no longer be available in paper form.

The Bureau of the Public Debt says it will stop making Savings Bonds available for purchase through banks or credit unions, ending the paper option. The only purchase method will be through the government's bond website, treasury direct.gov. Investors also can redeem bonds through the website.

It's all part of an effort to save the government $70 million over the first five years in reduced printing, mailing, storage and other costs, including fees paid to financial institutions for processing transactions.

"We're looking everywhere we can for financial savings in government," said Joyce Harris, director of public and legislative affairs at the Bureau of the Public Debt. "It's a lot less costly to go the electronic route."

It's not a headline-grabbing announcement, especially since there are more pressing topics out there involving government debts.

But the new policy does say something about changing public tastes and the gradual demise of these once-popular investments.

For starters, the shift to paperless Savings Bonds is just one more sign that electronics are taking over the financial world.

Stocks are bought and sold in electronic form, bank and credit-card accounts feature online statements and payments, and most income-tax returns now are filed through the Internet, so why not Savings Bonds?

In addition, the paperless option reflects slack demand. Savings Bonds, which once occupied a special place in the public's heart, have become just one more item in a crowded investment cupboard.

"There are a lot more things competing with Savings Bonds," said Harris. "Many are things that didn't exist years ago."

Since the first Savings Bond was sold in 1935, we've seen the advent of municipal bonds, money-market funds, 401(k) retirement plans, investment-based life insurance, no-load mutual funds, gold available for personal investment, inflation-protected Treasury bonds, section-529 college accounts, exchange-traded funds and a lot more.

Savings Bonds got a new lease on life with the introduction of inflation-protected Series I bonds, but sales have since fizzled.

Some 6.8 billion paper bonds have been sold since inception, but only 4 percent of that has come over the past decade despite rising wealth levels and a growing population.

One problem is that many of the rules for Savings Bonds are surprisingly tricky, such as those on early withdrawal penalties and Series-I rate calculations. The government hasn't done a good job explaining the intricacies, and most financial advisers can't earn anything from the bonds and thus don't have incentive to tout them.

Perhaps more than any other investment, Savings Bonds have a legacy of patriotism. This reached a peak during World War II.

In 1944, Uncle Sam sold $16 billion worth of bonds, with marketing campaigns led by celebrities such as actress Carole Lombard and songwriter Irving Berlin.

Bond sales didn't exceed $16 billion until 1992; on an inflation-adjusted basis, no year since has come close to matching 1944. In fact, one thing not commonly known about Savings Bonds was their role in sopping up excess cash and keeping a lid on inflation while the economy was in overdrive and consumer goods rationed during World War II.

"The danger of price inflation was growing as defense spending poured money into the economy and diverted consumer goods from the market," noted a government booklet written in 1991 to mark the 50th anniversary of Series-E bonds.

"This was a key factor in the successful financing of World War II and in keeping the pressures of inflation under control."

As noted, the new paperless policy doesn't end the Savings Bond program but takes it in a new, and perhaps diminished, direction. It could, for example, discourage the use of Savings Bonds as gifts because donors would need to set up accounts for both themselves and recipients and include a recipient's Social Security number.

Many people buy and forget about Savings Bonds. That's notable because they'll eventually stop earning interest, typically after 30 years.

I recently found a $25 Savings Bond that my grandfather purchased in June 1944, around the time of the Normandy invasion.

It's one of 45 million paper Savings Bonds worth $16.2 billion that matured and stopped paying interest but remain outstanding. Such bonds still can be redeemed at financial firms, and that will continue even after issuance goes paperless next year.

For whatever reason, my grandfather never cashed in that bond. Nor did my dad, who was listed as co-owner even though he was stationed in India at the time, helping to direct planes flying over the Himalayas in support of Chinese troops fighting the Japanese.

I don't intend to redeem the bond anytime soon. It's more valuable to me as a keepsake, and I'm probably not alone in that.

More on this topic
Slipping sales


Sales of U.S. Savings Bonds have slumped since hitting a record in 2005.

Year: Bond Sales

2005: $22.4 billion

2006: $6.3 billion

2007: $3.6 billion

2008: $3.4 billion

2009: $2.9 billion

2010: $2.6 billion

Source: Bureau of the Public Debt

by Russ Wiles The Arizona Republic Jul. 24, 2011 12:00 AM



Savings Bonds' shift to digital-only marks end of era

Reuters: Business News

National Commercial Real Estate News From CoStar Group

Latest stock market news from Wall Street - CNNMoney.com

Archive

Recent Comments