Economy > Housing market > Mortgage
ILLUSTRATION BY THOMAS BAAS FOR COSTUME 3
Money p. 1
Could you handle an extreme mortgage?
Property: Getting on the ladder can be a nightmare,
but don't despair.
As we illustrate here there are imaginative options
for those who can't take the
The Guardian Money
Saturday March 17, 2007
The Guardian p. 18 24 February 2009
mortgage borrowers / mortgage holders
mortgage rules USA
consumer watchdog / Bureau of Consumer Financial Protection
mortgage crisis USA
mortgages and the markets
Wall Street > mortgage
Countrywide Financial, the nation’s largest mortgage lender
mortgage lending / mortgage lending figures 2008-2010
mortgages and minorities
lender / mortgage lender
Council of Mortgage Lenders CML
make the mortgage
housing defaults USA
mortgage delinquencies USA
delinquent in paying mortgages USA
mortage debt USA
mortgage giants > Freddie Mac and Fannie Mae
that also have a government role,
and that guarantee
and securitize mortgages
Federal National Mortgage Association (Fannie Mae)
Freddie Mac USA
JPMorgan Chase & Company
HBOS, Britain’s biggest mortgage lender
housing bust / subprime mortgage crisis
arrears / mortgage arrears
Mortgage Justice Is Blind
30 October 2008
homeowner > negative equity
negative equity map of Britain
negative equity USA
homeowners > be underwater
mortgages underwater / negative equity
people owe more on their mortgages
houses are worth
slip into negative equity
mortgage lending UK
'mortgage rescue' firms
Britain's buy-to-let mortgage market
buy-to-let mortgage provider
repayments on a / your mortgage
endowment mortgages UK
home equity loans
long-term, fixed rate loan
The Guardian > sub-prime crisis
mortgage repossession orders
debt > repossessions UK
Cost of Seizing Fannie and Freddie
Surges for Taxpayers
June 19, 2010
The New York Times
By BINYAMIN APPELBAUM
CASA GRANDE, Ariz. — Fannie Mae and Freddie Mac took over a foreclosed home
roughly every 90 seconds during the first three months of the year. They owned
163,828 houses at the end of March, a virtual city with more houses than
Seattle. The mortgage finance companies, created by Congress to help Americans
buy homes, have become two of the nation’s largest landlords.
Bill Bridwell, a real estate agent in the desert south of Phoenix, is among the
thousands of agents hired nationwide by the companies to sell those
foreclosures, recouping some of the money that borrowers failed to repay. In a
good week, he sells 20 homes and Fannie sends another 20 listings his way.
“We’re all working for the government now,” said Mr. Bridwell on a recent
sun-baked morning, steering a Hummer through subdivisions laid out like circuit
boards on the desert floor.
For all the focus on the historic federal rescue of the banking industry, it is
the government’s decision to seize Fannie Mae and Freddie Mac in September 2008
that is likely to cost taxpayers the most money. So far the tab stands at $145.9
billion, and it grows with every foreclosure of a three-bedroom home with a
two-car garage one hour from Phoenix. The Congressional Budget Office predicts
that the final bill could reach $389 billion.
Fannie and Freddie increased American home ownership over the last half-century
by persuading investors to provide money for mortgage loans. The sales pitch
amounted to a money-back guarantee: If borrowers defaulted, the companies
promised to repay the investors.
Rather than actually making loans, the two companies — Fannie older and larger,
Freddie created to provide competition — bought loans from banks and other
originators, providing money for more lending and helping to hold down interest
“Our business is the American dream of home ownership,” Fannie Mae declared in
its mission statement, and in 2001 the company set a target of helping to create
six million new homeowners by 2014. Here in Arizona, during a housing boom
fueled by cheap land, cheap money and population growth, Fannie Mae executives
trumpeted that the company would invest $15 billion to help families buy homes.
As it turns out, Fannie and Freddie increasingly were channeling money into
loans that borrowers could not afford. As defaults mounted, the companies
quickly ran low on money to honor their guarantees. The federal government,
fearing that investors would stop providing money for new loans, placed the
companies in conservatorship and took a 79.9 percent ownership stake, adding its
own guarantee that investors would be repaid.
The huge and continually rising cost of that decision has spurred national
debate about federal subsidies for mortgage lending. Republicans want to sever
ties with Fannie and Freddie once the crisis abates. The Obama administration
and Congressional Democrats have insisted on postponing the argument until after
the midterm elections.
In the meantime, Fannie and Freddie are, at public expense, removing owners who
cannot afford their homes, reselling the houses at much lower prices and
financing mortgage loans for the new owners.
The two companies together accounted for 17 percent of real estate sales in
Arizona during the first four months of the year, almost three times their share
of the market during the same period last year, according to an analysis by MDA
Valarie Ross, who lives in the Phoenix suburb of Avondale, has watched six of
the nine homes visible from her lawn chair emptied by moving trucks during the
last year. Four have been resold by the government. “One by one,” she said.
The population of Pinal County, where Mr. Bridwell lives and works, roughly
doubled to 340,000 over the last decade. Developers built an entirely new city
called Maricopa on land assembled from farmers. Buyers camped outside new
developments, waiting to purchase homes. One builder laid out a 300-lot
subdivision at the end of a three-mile dirt road and still managed to sell 30 of
Mr. Bridwell sold plenty of those houses during the boom, then cut workers as
prices crashed. Now his firm, Golden Touch Realty, again employs as many people
as at the height of the boom, all working exclusively for Fannie Mae. The
payroll now includes a locksmith to secure foreclosed homes and two clerks
devoted to federal paperwork.
Golden Touch gets more listings from Fannie Mae than any other firm in Pinal
County. Mr. Bridwell said he was ready to jump because he remembered the last
time the government ended up owning thousands of Arizona houses, after the
late-1980s collapse of the savings and loan industry.
“The way I see it,” said Mr. Bridwell, whose glass-top desk displays membership
cards from the Republican National Committee, “is that we’re getting these homes
back into private hands.”
Selling a house generally costs the government about $10,000. The outsides are
weeded and the insides are scrubbed. Stolen appliances are replaced, brackish
pools are refilled. And until the properties are sold, they must be maintained.
Fannie asks contractors to mow lawns twice a month during the summer, and pays
them $80 each time. That’s a monthly grass bill of more than $10 million.
All told, the companies spent more than $1 billion on upkeep last year.
“We may be behind many loans on the same street, so we believe that it’s in
everyone’s best interest to aggressively do property maintenance,” said Chris
Bowden, the Freddie Mac executive in charge of foreclosure sales.
Prices have plunged. So by the time a home is resold, Fannie and Freddie on
average recoup less than 60 percent of the money the borrower failed to repay,
according to the companies’ financial filings. In Phoenix and other areas where
prices have fallen sharply, the losses often are larger.
Foreclosures punch holes in neighborhoods, so residents, community groups and
public officials are eager to see properties reoccupied. But there also is
concern that investors are buying many foreclosures as rental properties, making
it harder for neighborhoods to recover.
Real estate agents tend to favor investors because the sales close surely and
quickly and there is the prospect of repeat business. But community advocates
say that Fannie and Freddie have an obligation to sell houses to homeowners.
David Adame worked for Fannie Mae’s local office during the boom, on programs to
make ownership more affordable. Now with prices down sharply, Mr. Adame sees a
second chance to put people into homes they can afford.
“Yes, move inventory,” said Mr. Adame, now an executive focused on housing
issues at Chicanos por la Causa, a Phoenix nonprofit group, “but if we just move
inventory to investors, then what are we doing?”
Executives at both Fannie and Freddie say they have an overriding obligation to
limit losses, but that they are taking steps to sell more homes to families.
Fannie Mae last summer announced that it would give people seeking homes a
“first look” by not accepting offers from investors in the first 15 days that a
property is on the market. It also offers to help buyers with closing costs, and
prohibits buyers from reselling properties at a profit for 90 days, to
discourage speculation. Fannie Mae said that 68.4 percent of buyers this year
had certified that they would use the house as a primary residence.
Freddie Mac has adopted fewer programs, but it said it had sold about the same
share of foreclosures to owner-occupants.
The companies also have agreed to sell foreclosed homes to nonprofits using
grants from the federal Neighborhood Stabilization Program. Chicanos por la
Causa, which won $137 million under the program in partnership with nonprofits
in eight other states, plans to buy more than 200 homes in Phoenix in the next
two years. It plans to renovate them to sell to local families.
The scale of such efforts is small. The home ownership rate in Phoenix continues
to fall as foreclosures pile up and renters replace owners.
But John R. Smith, chief of Housing Our Communities, another Phoenix-area group
using federal money to buy foreclosures, says he tries to focus on salvaging one
property at a time.
“I tell them, ‘O.K., you want to unload 10 houses to that guy, fine,’ ” he said.
“ ‘Now give me this one. And this one. And one over here.’ ”
Cost of Seizing Fannie
and Freddie Surges for Taxpayers,
U.S. Mortgage Delinquencies
Reach a Record High
November 20, 2009
The New York Times
By DAVID STREITFELD
The economy and the stock market may be recovering from their swoon, but more
homeowners than ever are having trouble making their monthly mortgage payments,
according to figures released Thursday.
Nearly one in 10 homeowners with mortgages was at least one payment behind in
the third quarter, the Mortgage Bankers Association said in its survey. That
translates into about five million households.
The delinquency figure, and a corresponding rise in the number of those losing
their homes to foreclosure, was expected to be bad. Nevertheless, the figures
underlined the level of stress on a large segment of the country, a situation
that could snuff out the modest recovery in home prices over the last few months
and impede any economic rebound.
Unless foreclosure modification efforts begin succeeding on a permanent basis —
which many analysts say they think is unlikely — millions more foreclosed homes
will come to market.
“I’ve been pretty bearish on this big ugly pig stuck in the python and this
cements my view that home prices are going back down,” said the housing
consultant Ivy Zelman.
The overall third-quarter delinquency rate is the highest since the association
began keeping records in 1972. It is up from about one in 14 mortgage holders in
the third quarter of 2008.
The combined percentage of those in foreclosure as well as delinquent homeowners
is 14.41 percent, or about one in seven mortgage holders. Mortgages with
problems are concentrated in four states: California, Florida, Arizona and
Nevada. One in four people with mortgages in Florida is behind in payments.
Some of the delinquent homeowners are scrambling and will eventually catch up on
their payments. But many others will slide into foreclosure. The percentage of
loans in foreclosure on Sept. 30 was 4.47 percent, up from 2.97 percent last
In the first stage of the housing collapse, defaults and foreclosures were
driven by subprime loans. These loans had low introductory rates that quickly
moved to a level that was beyond the borrower’s ability to pay, even if the
homeowner was still employed.
As the subprime tide recedes, high-quality prime loans with fixed rates make up
the largest share of new foreclosures. A third of the new foreclosures begun in
the third quarter were this type of loan, traditionally considered the safest.
But without jobs, borrowers usually cannot pay their mortgages.
“Clearly the results are being driven by changes in employment,” Jay Brinkmann,
the association’s chief economist, said in a conference call with reporters.
In previous recessions, homeowners who lost their jobs could sell the house and
move somewhere with better prospects, or at least a cheaper cost of living. This
time around, many of the unemployed are finding that the value of their property
is less than they owe. They are stuck.
“There will be a lot more distressed supply entering the market, and it will
move up the food chain to middle- and higher-price homes,” said Joshua Shapiro,
chief United States economist for MFR Inc.
Many analysts say they believe that foreclosures, instead of peaking with the
unemployment rate as they traditionally do, will most likely be a lagging
indicator in this recession. The mortgage bankers expect foreclosures to peak in
2011, well after unemployment is expected to have begun falling.
There was one sliver of good news in the survey: the percentage of loans in the
very first stage of default — no more than 30 days past due — was down slightly
from the second quarter. If that number continues to decline, at least the ranks
of the defaulted will have peaked.
“It’s arguably a positive, but it doesn’t undermine the fact that there are
still five or six million foreclosures in process,” Ms. Zelman said.
The number of loans insured by the Federal Housing Administration that are at
least one month past due rose to 14.4 percent in the third quarter, from 12.9
percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.
The mortgage group’s survey noted, however, that the F.H.A. was issuing so many
loans — about a million in the last year — that it had the effect of masking the
percentage of problem loans at the agency. Most loans enter default when they
are older than a year.
When the association removed the new loans from its calculations, the percentage
of F.H.A. mortgages entering foreclosure was 30 percent higher.
The association’s survey is based on a sample of more than 44 million mortgage
loans serviced by mortgage companies, commercial and savings banks, credit
unions and others. About 52 million homes have mortgages. There are 124 million
year-round housing units in the country, according to the Census Bureau.
Delinquencies Reach a Record High, NYT, 20.11.2009,
Mortgages and Minorities
December 9, 2008
The New York Times
The mortgage crisis that has placed millions of Americans at risk of losing
their homes has been especially devastating for black and Hispanic borrowers and
their families. It seems clear at this point that minorities were more likely
than whites to be steered into risky, high-priced loans — even when researchers
controlled for such crucial factors as income, loan size and location.
The Congress that takes office in January can start to deal with this problem by
strengthening fair-lending laws, especially the Community Reinvestment Act,
which encourages fair, sound lending practices while requiring banks to lend,
invest and open branches in low- and moderate-income areas.
Lawmakers should also extend that law to cover the often fly-by-night
mortgage-lending companies that helped drive the subprime crisis. Those
companies saddled entire neighborhoods with risky, high-priced loans that
borrowers could never hope to pay back, sold those loans to Wall Street and then
went out of business.
Congress needs to keep in mind that many of those players are surely to be back
in operation somewhere down the line. Some already have returned in the guise of
offering to help homeowners avoid foreclosure.
The need to revisit fair-lending law is evident in numerous studies of federal
lending data. A particularly striking analysis in 2006 by the National Community
Reinvestment Coalition found that nearly 55 percent of loans to
African-Americans, 40 percent of loans to Hispanics and 35 percent of loans to
American Indians fell into the high-cost category, as opposed to about 23
percent for whites. There also were troubling gender differences. Women got
less-favorable terms than men.
A classic discrimination study by the reinvestment coalition found that black
and Hispanic people who posed as borrowers received significantly worse
treatment and were offered costlier, less-attractive loans more often than
whites — even though minority testers had been given more attractive financial
profiles, including better credit standings and employment tenures. That study,
and others, go a long way to rebutting mortgage companies’ claims that lending
patterns are explained by so-called risk characteristics like credit scores.
John Taylor, the coalition’s president, told a Congressional hearing last year,
that minority borrowers were paying a “race tax.” While lenders are required to
report to the federal government such things as race, gender, census tract,
amount of loan and income, they omit credit score data. By guarding the single
most important statistic used in making loans, the lenders have given themselves
a ready shield against charges of discrimination.
But with indications of discrimination popping up everywhere, Congress has no
choice but to require lenders to report on all data that form the basis of
lending decisions, including data that would permit neutral third parties to
determine whether lenders were discriminating by race. Ideally, lenders would
have to report, not just on the borrower’s credit worthiness, but on details of
the terms and conditions of the loan itself.
Looking back, it’s hard to say whether such reporting requirements would have
forestalled the subprime crisis. Certainly, they would have given consumer
advocates and regulators more information earlier on. There is no excuse for not
putting them in place now to avoid the possibility of history repeating itself
and having all those risky, high-priced loans issued and sold off as securities
before anyone intervenes.
Minorities, NYT, 9.12.2008,
Return of the Predators
November 24, 2008
The New York Times
The demise of the subprime mortgage industry has been hard on predatory
brokers, too. They feasted for years on bad loans until reality crashed down and
the money ran out, and there they were: sharks without a frenzy.
Now they are circling again. Predators of every sort have regrouped and returned
to their old ways, this time as loan-modification companies, inserting
themselves between hard-strapped homeowners and banks, offering to work deals —
for cash up front.
It’s a high-pressure, high-volume business, advertising in the usual low-rent
ways: talk-radio ads, Web come-ons, fliers on car windshields. The ads are full
of glossy promises, like this one for a Long Island outfit: “Reduce your
mortgage rate to as low as 4%. No refinancing — no closing costs. Reduce your
monthly payment. Foreclosures, late pays/bad credit okay.”
It’ll cost you — in this case, 1 percent of your outstanding loan, half of it in
There’s often nothing illegal about this booming and largely unregulated
business. Some shops are true scams, taking the money and running. But others
are just immoral, profiting on fear and false hopes with expensive services that
nonprofit organizations and government agencies offer for nothing.
Troubled homeowners know all about the relentlessness of the loan-rescue racket:
it fills their mailboxes and sends salespeople to lurk on their doorsteps.
Foreclosure filings are public records, and loan modifiers routinely swarm
courthouses to find leads. Loan counselors at the Long Island Housing
Partnership, a respected nonprofit in Hauppauge, N.Y., tell of scammers crashing
its housing workshops, posing as troubled borrowers, then working the crowd with
And they do work hard. A call to one law firm’s toll-free number plugged on WABC
radio quickly gets a call back with a hard sell. “We have a 100 percent success
rate” in renegotiating loans, an operator sweetly vows, reluctant to say more
until you tell her what your mortgage payment is and how far behind you are.
The painful truth is that nobody has a 100 percent success rate, and not every
loan is fixable. Banks have recently made public commitments to putting more
effort into working loans out. But homeowners need to realize that the best way
to do that is directly with the lender or through a reputable nonprofit
The for-profit loan modifier’s cruelly deceptive sales pitch is that you get
what you pay for. Nonprofit organizations, which work for no fee, say they can
strike better deals, because they have longstanding relationships with lenders
that storefront firms do not have.
But that doesn’t mean that well-meaning advocates are aggressive and effective
in finding people who need help. The government, banks and nonprofit
organizations need to be more creative and assertive to outmaneuver the
predators — to send the competing message that hope doesn’t require thousands of
dollars in cash up front, although it does mean facing up to hard truths about
one’s finances and future.
Nonprofits frequently complain about how hard it is to get at-risk homeowners to
ask for help. It’s true that people deep in debt are often embarrassed and
wrapped in blankets of denial. They don’t open mail or reliably make
appointments. But the good actors in this bad drama need to get better at
working around that problem, before more good money is thrown after bad.
Return of the Predators,
One in five homeowners
with mortgages underwater
Fri Oct 31, 2008
By Jonathan Stempel
NEW YORK (Reuters) - Nearly one in five U.S. mortgage
borrowers owe more to lenders than their homes are worth, and the rate may soon
approach one in four as housing prices fall and the economy weakens, a report on
About 7.63 million properties, or 18 percent, had negative equity in September,
and another 2.1 million will follow if home prices fall another 5 percent,
according to a report by First American CoreLogic.
The data, covering 43 states and Washington, D.C., includes borrowers
nationwide, even those who took out mortgages before housing prices began to
soar early this decade.
Seven hard-hit states -- Arizona, California, Florida, Georgia, Michigan, Nevada
and Ohio -- had 64 percent of all "underwater" borrowers, but just 41 percent of
"This is very much a regional problem, and people tend to forget that," said
David Wyss, chief economist at Standard & Poor's, who expects home prices
nationwide to fall another 10 percent before bottoming late next year.
"Most of the country is not in bad shape," he continued. "Things seem to be
stabilizing in Michigan, but the big bubble states -- Florida, California,
Arizona and Nevada -- are still very overpriced."
About 68 percent of U.S. adults own their own homes, and about two-thirds of
them have mortgages.
JPMorgan Chase & Co, one of the biggest mortgage lenders, on Friday offered to
modify $70 billion of mortgages to keep a potential 400,000 homeowners out of
foreclosure. Bank of America Corp, which bought Countrywide Financial Corp in
July, also has a large loan modification program.
HOME PRICES, ECONOMY UNDER PRESSURE
U.S. home prices fell a record 16.6 percent in August from a year earlier, with
declines in all 20 major metropolitan areas measured by the S&P/Case-Shiller
Home Price Indices.
Foreclosure filings rose 71 percent in the third quarter to a record 765,558,
according to RealtyTrac.
Meanwhile, the Commerce Department said gross domestic product fell at a 0.3
percent rate in the third quarter. Some experts expect the worst U.S. recession
since the early 1980s.
Yet despite a series of expensive government programs to spur lending, mortgage
rates are rising, making it tougher to borrow or refinance. The rate on a
30-year fixed-rate mortgage jumped this week to 6.46 percent from 6.04 percent a
week earlier, Freddie Mac said.
Meanwhile, borrowing costs on hundreds of thousands of adjustable-rate mortgages
are expected to reset higher in the coming months. The problem may be
particularly serious for borrowers with rates tied to the London Interbank
Offered Rate, or Libor, which is abnormally high relative to benchmark U.S.
Last week, Wachovia Corp said borrowers with its "Pick-a-Pay" ARMs and living in
or near Stockton and Merced, California, owed at least 55 percent more on their
mortgages, on average, than their homes were worth. Wells Fargo & Co is buying
NEVADA HARD HIT, NEW YORK AT RISK
First American CoreLogic, an affiliate of title insurance and real estate
services company First American Corp, said states with large numbers of homes
with negative equity either had rapid price appreciation, many homes bought with
subprime mortgages or as speculative investments, steep manufacturing declines,
or a combination.
Nevada was hardest hit, where mortgage borrowers on average owed 89 percent of
what their homes were worth, and 48 percent had negative equity. Michigan was
second, with an 85 percent loan-to-value ratio and 39 percent of borrowers
New York fared best, with an average 48 percent loan-to-value ratio and just 4.4
percent of mortgage borrowers with negative equity.
But Wyss said this could change as financial market upheaval transforms Wall
Street. This month, New York City Comptroller William Thompson estimated that
the city alone might lose 165,000 jobs over two years.
"We're going to see home prices coming down pretty significantly in New York,"
Wyss said. "A lot of people are losing jobs, and won't be getting their usual
bonuses, and that leaves less money for housing."
(Reporting by Jonathan Stempel;
Additional reporting by Al Yoon;
One in five
homeowners with mortgages underwater, R, 31.10.2008,
Britain faces crisis
as negative equity to reach 2
October 19, 2008
From The Sunday Times
Robert Watts and Jonathan Oliver
Collapsing house prices are plunging 60,000 homeowners a month
into negative equity, which means the country is on course for a worse crisis
than the 1990s crash.
At current trends, 2m households will enter negative equity by 2010,
outstripping the 1.8m affected at the bottom of the last housing slump.
New research from Standard & Poor’s, the ratings agency, coincides with evidence
that banks are aggressively seizing homes whose owners have slipped just a few
hundred pounds behind on their mortgage payments.
It is a further signal that the financial crisis is now infecting the real
economy as hundreds of thousands of families face the prospect of being unable
to move house because their home is worth less than the value of their mortgage.
Many more homeowners will now be afraid that the bank may suddenly repossess
their property. Repossessions have soared to 19,000 in the first half of the
year, up 40% on the previous six months. That figure is expected to rise to
26,000 in the second half of 2008.
Economists believe house prices will fall by up to 35% from their peak by 2010.
This compares with a drop of only 20% in the early 1990s.
Last night opposition politicians blamed Labour for encouraging a “culture of
indebtedness” that now threatens to cause an implosion in the housing market.
Philip Hammond, the shadow Treasury chief secretary, said: “We are now paying
the price for a decade of debt-fuelled boom, with hundreds of thousands of
people unable to sell their property, after being encouraged by the government
to overstretch themselves to get on the property ladder.”
Vince Cable, the Liberal Democrat finance spokesman, urged Gordon Brown to do
more to prevent unnecessary repossessions. “It genuinely must be a lender’s last
resort, which right now it certainly is not,” he said.
With official figures out this week expected to show Britain has fallen into
recession, Brown is planning a 1930s-style programme of public works, spending
billions on new schools, homes and transport projects. He has urged senior
colleagues to increase expenditure on big capital projects – despite forecasts
that tax revenues are about to collapse.
Brown’s ambitious plan is modelled on Franklin Roosevelt’s New Deal, which
helped drag America out of the Great Depression. A Whitehall source said: “We
cannot afford to risk the complete collapse of our construction industry. We
have to make sure that the skills have not been lost when we finally pull out of
Standard & Poor’s has calculated that by the end of the month 335,000 homes will
be worth less than their mortgages. The figure represents a rise of 260,000 in
Capital Economics, the City consultancy, expects up to 2m properties will be in
negative equity by 2010 — more than in the recession of the early 1990s.
Northern Rock, the bank nationalised this year, is said to be behind a wave of
aggressive repossessions. In the nine months to the end of September, the
state-owned lender made more than 2,000 seizures.
Esther Spick, from Surrey, is three months in arrears on her Northern Rock
mortgage. The lender has launched repossession proceedings, even though she owes
just £1,200. In one case reported to The Sunday Times by a housing charity, the
bank is trying to seize a home where the owner is just £800 in arrears, even
though he has about £40,000 of equity in the £180,000 property.
Chris Tapp, director of Credit Action, a debt charity, said: “What makes these
negative equity statistics so worrying is that they come at a time when banks
are behaving so unreasonably over repossessions.
“We are particularly dismayed with the inflexibility of Northern Rock. ”
Adam Sampson, chief executive of Shelter, the housing charity, said: “Northern
Rock is behaving very aggressively on repossessions, but it is not the only
lender acting like that.”
The Council of Mortgage Lenders said there were no industry guidelines for how
deeply in arrears a lender had to be for a home loan provider to be entitled to
launch repossession proceedings.
The government said last night it would bring forward laws forcing lenders to
offer alternative payment schemes before they were allowed to take back
possession of the property.
Northern Rock denied that it was overly aggressive. “Repossession proceedings
are only launched as a last resort,” it said.
The details of the prime minister’s extra spending on public works is expected
to be unveiled in the pre-budget report next month. Brown has already tasked his
new “enforcer”, the Cabinet Office minister, Liam Byrne, with compiling a list
of major construction projects at risk from the credit crunch that would benefit
from extra government support.
Brown’s handling of the financial crisis has failed to improve Labour’s
electoral prospects. Despite most voters saying he had performed well over the
past few weeks, only 13% said they were now more likely to vote Labour, an ICM
survey for the News of the World found.
Britain faces crisis
as negative equity to reach 2 million,
Rescue to Stabilize Lending,
U.S. Takes Over
Mortgage Finance Titans
The New York Times
By STEPHEN LABATON
and EDMUND L. ANDREWS
— The Bush administration seized control of the nation’s two largest mortgage
finance companies on Sunday, seeking to shrink drastically their outsize
influence on Wall Street and on Capitol Hill while at the same time counting on
them to pull the nation out of its worst housing crisis in decades.
The bailout plan for the companies, Fannie Mae and Freddie Mac, a seismic event
in a year of repeated financial crises followed by aggressive federal
intervention, places the companies in a government conservatorship, much like a
bankruptcy reorganization. The plan also replaces the management of the
The rescue package represents an extraordinary federal intervention in private
enterprise. It could become one of the most expensive financial bailouts in
American history, though it will not involve any immediate taxpayer loans or
The Treasury secretary, Henry M. Paulson Jr., who engineered the plan, would not
say how much capital the government might eventually have to provide, or what
the ultimate cost to taxpayers might be. Two months ago, the Congressional
Budget Office gave a rough estimate of $25 billion. One senior government
official, speaking on the condition of anonymity, signaled on Sunday that even
that figure was optimistic.
Mr. Paulson said Sunday that it was important to rescue the mortgage giants
because a failure of either company would cause turmoil in financial markets in
the United States and around the world.
“This turmoil would directly and negatively impact household wealth: from family
budgets, to home values, to savings for college and retirement,” he said. “A
failure would affect the ability of Americans to get home loans, auto loans and
other consumer credit and business finance. And a failure would be harmful to
economic growth and job creation.”
The plan received wide bipartisan support on Sunday, from Congressional
lawmakers and both presidential campaigns.
As part of the plan, the chief executives of both companies were replaced.
Herbert M. Allison Jr., the former chairman of TIAA-CREF, the huge pension fund
for teachers that also offers mutual funds, will take over Fannie Mae and
succeed Daniel H. Mudd. At Freddie Mac, David M. Moffett, currently a senior
adviser at the Carlyle Group private equity firm, succeeds Richard F. Syron. Mr.
Mudd and Mr. Syron, however, will stay on during a transition period.
The plan also commits the government to provide as much as $100 billion to each
company to backstop any shortfalls in capital. It enables the Treasury to
ultimately buy the companies outright at little cost. It bans them from lobbying
the government, putting an end to their ability to use their political machine
on Capitol Hill.
It also eliminates dividend payments to current shareholders while protecting
the principal and interest payments on the debt, now held by foreign central
banks, financial institutions, pensions funds and others.
The Treasury will force both companies to shrink their portfolios over the long
term; they now hold or guarantee about half of the country’s mortgages. In
addition, the government plans to buy significant amounts of their
mortgage-backed securities on the open market, beginning with the purchase of $5
billion worth this month. This step, never before undertaken by the government,
could begin to restore some confidence in the credit markets and lead to lower
interest rates for home mortgages.
For the companies, the takeover caps an ignominious downfall. Fannie was created
during the depths of the Great Depression, and Freddie in 1970, to help make
mortgages more affordable for homeowners. The companies buy billions of dollars
in mortgages each month from commercial lenders. Some are sold to investors as
mortgage-backed securities; others are held by the companies in their own
The plan represents a cease-fire in a decades-long ideological battle over the
proper role of the companies. Free-market conservatives see the companies as
extensions of “big government,” while Democrats have protected them as the main
vehicle to promote affordable housing for middle- and lower-income people.
Alan Greenspan, the former Federal Reserve chairman, and Lawrence H. Summers, a
Treasury secretary under President Bill Clinton, along with many other critics,
have long maintained that the companies were too powerful politically and
financially, and that their huge portfolios posed enormous risks to the
Moreover, these critics have complained, the companies have used their ability
to borrow at low interest rates to dominate the mortgage-finance market,
usurping the role of other financial institutions, which do not have the same
Free-market adherents have warned of impending disaster as Fannie and Freddie
used an implicit government backing to borrow at will, with only a tiny sliver
of capital to protect them from nasty surprises like the recent sharp decline in
housing prices and rise in foreclosures.
Mr. Paulson has sought to avoid taking sides in the debate, but in recent months
came to the conclusion that the companies’ conflicting missions of providing
federally backed financing for affordable housing while serving shareholders
“Market discipline is best served when shareholders bear both the risk and the
reward of their investment,” Mr. Paulson said on Sunday. “While conservatorship
does not eliminate the common stock, it does place common shareholders last in
terms of claims on the assets of the enterprise.”
Holders of the companies’ common stock will not fare well. The plan suspends
their dividend payments and holds the potential to make their shares virtually
worthless if the government chooses to exercise its right to buy the common
stock. The stock of both companies, which traded above $60 a share last year,
had fallen below $10 a share recently. Their shares will continue to trade and
could fall further as a result of the government seizure.
Mr. Paulson made clear that the solution put forward on Sunday would only defer
the most important decisions about the mission of the companies for the next
president and Congress.
At a news conference on Sunday, Mr. Paulson said: “There is a consensus today
that these enterprises pose a systemic risk and they cannot continue in their
current form. Government support needs to be either explicit or nonexistent, and
structured to resolve the conflict between public and private purposes.”
The plan requires the companies to shrink their portfolios long after the
administration leaves, officials acknowledged, adding that they hoped to prod
Congress into deciding what the role of the companies should be.
Hoping to limit potential taxpayer losses and gain any financial windfall if the
companies are restored to profitability, the administration, in exchange for the
investment commitment, will receive so-called stock warrants, or purchase
rights, for up to 80 percent of the companies’ common shares at less than $1 a
share. In after-hours trading on Sunday, Freddie Mac fell $1.06, or nearly 21
percent while Fannie Mae dropped $1.54, or 22 percent.
The companies agreed to provide the government with $1 billion of new preferred
senior stock, which will pay the Treasury a dividend of at least 10 percent a
year, as well as an unspecified quarterly payment to compensate the Treasury for
any taxpayer money injected into the companies.
The companies will be allowed to “modestly increase” the size of their existing
investment portfolios until the end of 2009, which means they can use some of
their new taxpayer-supplied capital to buy and hold new mortgages in investment
But in a strong indication of Mr. Paulson’s wish to wind down the companies’
portfolios, drastically shrink their role and perhaps eliminate their unique
status altogether, the plan calls for the companies to start reducing their
investment portfolios 10 percent a year, beginning in 2010.
In addition, the Treasury Department will create a so-called Secured Lending
Credit Facility, a backup source of borrowing for the companies in the event
that they cannot borrow enough money on the open market to finance their main
business of buying mortgages and reselling them as pools of mortgage-backed
While the government takeover seemed to catch some financial experts by
surprise, Treasury officials appeared to have little choice, with the credit
markets in a tailspin and investors reluctant to buy mortgages with even a hint
of risk. Fannie and Freddie now guarantee about 70 percent of all new home
loans, said Mr. Lockhart, the chief regulator of the companies.
The initial reaction to the plan was mostly positive. Senator John McCain, the
Republican nominee for president, said on CBS’s “Face the Nation” on Sunday that
he supported the Treasury move, but he also implicitly criticized the Bush
“It’s an example of cronyism, special interest, lobbyists,” he said, adding that
the companies needed “more regulation, more oversight, more transparency, more
of everything, and frankly, a dramatic reduction in what they do.”
Senator Joseph R. Biden Jr., the Democratic nominee for vice president, said on
NBC’s “Meet the Press” Sunday that he had spoken to Mr. Paulson on Saturday
night, and that he thought the plan had a good chance of succeeding. “It’s not
an official reorganization. It will be left to the next administration and the
Congress to make those judgments,” Mr. Biden said.
After being briefed by Mr. Paulson, the billionaire investor Warren E. Buffett
said: “Secretary Paulson has made exactly the right decision for the country. He
is minimizing the problem of moral hazard and maximizing the benefits for the
housing market and for the smooth functioning of financial markets.”
Democratic and Republican lawmakers also spoke approvingly of the decision. They
said that restoring stability to the financial markets was the top priority. But
some longtime critics of the companies complained that their warnings had gone
unheeded for too long.
“Fannie and Freddie were allowed to grow too quickly and for too long without
the strong oversight required of such government chartered firms,” said Senator
John E. Sununu, Republican of New Hampshire, who is facing a tough campaign for
Asian stock markets rallied at the opening on Monday after the Treasury’s
announcement. The Tokyo market rose 2.8 percent and Australia’s market jumped
Futures contracts on the Standard & Poor’s 500-stock index jumped more than 2
percent in early Asian trading as investors concluded that the decision had
strengthened the prospects for American businesses, particularly banks, and for
the American economy.
The dollar and yen weakened against the euro and the British pound by late
Monday morning in Asia as investors began to conclude that European economies
might not be in as grave danger as they had seemed last week.
Treasury officials emphasized that the companies would open for business as
usual on Monday and that, at least for now, almost nothing would change in their
normal course of business.
Keith Bradsher contributed reporting from Hong Kong.
In Rescue to Stabilize Lending,
U.S. Takes Over Mortgage
Finance Titans, NYT, 8.9.2008,
One in seven homeowners
could be victims of
· Drop in property prices could be as sharp as 35%
· Credit agency warns of return to crisis of early 90s
Thursday July 31 2008
Larry Elliott, economics editor
Britain is on course for a repeat of the negative equity
crisis of the early 1990s as a further year of tumbling house prices leaves one
in seven homeowners in a property worth less than their mortgage, the ratings
agency Standard & Poor's warned yesterday.
In a report on the state of the housing market, the company punctured optimism
about a soft landing when it predicted that a further 17% drop in the cost of
the average home would prompt a rise from 70,000 to 1.7 million in negative
equity cases - equalling the peak of the housing market meltdown of the early
Andrew South, a credit analyst at S&P, said: "The downward trend in UK house
prices now seems well established, and we expect prices to continue falling in
the near term."
The rapid increase in house prices during the decade-long upswing has meant that
only a fraction of mortgage payers - 0.6% - are currently in negative equity.
But in recent months house prices have been falling at the sharpest rate on
record and S&P said that for every further percentage point fall in the cost of
property, 0.5%-1.5% of borrowers (between 60,000 and 180,000) could enter
negative equity. Noting that the trough in the cycle would not be reached until
2009, S&P said: "At this point, we expect 1.7 million borrowers - around 14% -
would be in negative equity."
Other forecasters are even gloomier than S&P, with the consultancy firm Capital
Economics predicting a 35% drop in house prices from their peak last year.
Liberal Democrat Treasury spokesman Vince Cable said: "When I warned of this
degree of negative equity a few months ago I was accused of excessive
scaremongering. But the idea of nearly two million homeowners facing negative
equity is now regarded as mainstream by many experts."
A return to the negative equity levels of the early 1990s would put additional
pressure on the government to help homeowners. Alistair Darling received an
interim report this week on the mortgage market from the former HBOS chief Sir
James Crosby, and is expected to come up with proposals in the autumn pre-budget
Some mortgage providers have been taking advantage of more stable conditions in
the City's money markets to reduce home loan costs marginally over the past few
weeks, but a cut in the bank rate from the Bank of England is considered highly
unlikely while inflation is rising.
It discussed raising interest rates at its meeting this month and cheaper
borrowing costs are seen as off the agenda until late 2008 at the earliest.
S&P said borrowers in the buy-to-let and sub-prime sectors were most at risk
from negative equity. "A further 17% decline in house prices could put around
24% of non-conforming borrowers into negative equity, compared with only 13% of
The predictions by S&P came as the British Bankers' Association (BBA) published
statistics suggesting that the industry was not returning to the record level of
repossessions of 1992, when 75,500 homes were taken back by lenders.
The statistics, which cover 25 years of banking to the end of last year, showed
that 27,000 homes were repossessed last year.
There are predictions that repossessions could reach 45,000 by the end of this
year, which would represent 12 out of every 10,000 properties that have a
The BBA statistics reflect the impact of the credit crunch. By the end of 2007,
mortgage lending had fallen by 17%, although the average value of a loan had
increased by 10% to £153,900.
Back to the 90s?
of owners may be in negative equity by 2009,
says Standard & Poor's
Number of people this would affect,
the same as in the early 1990s
Number of homes repossessed in 1992,
when the crash was at its height
Number predicted for 2008,
12 out of every 10,000 mortgaged properties
in seven homeowners could be victims of negative equity,
Bush Signs Housing Bill
July 30, 2008 8:08 a.m.
WASHINGTON -- President George W. Bush on Wednesday signed a massive housing
bill intended to provide mortgage relief for 400,000 struggling U.S. homeowners
and to stabilize financial markets.
Mr. Bush signed the bill without any fanfare or signing ceremony, affixing his
signature to the measure he once threatened to veto in the White House's Oval
Office in the early morning hours. He was surrounded by top administration
officials, including Treasury Secretary Henry Paulson and Housing Secretary
"We look forward to put in place new authorities to improve confidence and
stability in markets," White House spokesman Tony Fratto said. He added that the
Federal Housing Administration would begin right away to implement new policies
"intended to keep more deserving American families in their homes."
The measure, regarded as the most significant U.S. housing legislation in
decades, lets homeowners who cannot afford their payments refinance into more
affordable government-backed loans rather than losing their homes. It offers a
temporary financial lifeline to troubled mortgage companies Fannie Mae and
Freddie Mac, and tightens controls over the two government-sponsored businesses.
The House of Representatives passed the bill a week ago; the Senate voted
Saturday to send it to the president.
Mr. Bush didn't like the version emerging from Congress, and initially said he
would veto it, particularly over a provision containing $3.9 billion in
neighborhood grants. He contended the money would benefit lenders who helped
cause the mortgage meltdown, encouraging them to foreclose rather than work with
borrowers. But he withdrew that threat early last week, saying hurting
homeowners couldn't wait -- and even blaming the Democratic Congress' delays in
action for forcing an imperfect solution.
Meanwhile, many Republicans, particularly those from areas hit hardest by
housing woes, were eager to get behind a housing rescue as they looked ahead to
tough re-election contests. Mr. Paulson's request for the emergency power to
rescue Fannie Mae and Freddie Mac helped push through the measure. So did the
creation of a regulator with stronger reins on the government-sponsored
companies, which Republicans have long sought.
Democrats won cherished priorities in the bargain: the aid for homeowners, a
permanent affordable housing fund financed by Fannie Mae and Freddie Mac, and
the $3.9 billion in neighborhood grants.
Bush Signs Housing
Bill, WSJ, 30.7.2008,
Worst Fears Ease, for Now,
on Mortgage Giants’ Fate
July 12, 2008
The New York Times
By STEPHEN LABATON
WASHINGTON — A day that began with a stomach-churning drop in
stock prices for the two largest mortgage finance companies ended with a measure
of relief, after government officials and lawmakers managed to calm investors
worried about the health of the two companies.
Bush administration officials had worked into the early morning hours on Friday
drawing up contingency plans to rescue the companies, Fannie Mae and Freddie
Mac, should their financial plight worsen. And when both companies’ stocks fell
50 percent initially, some investors feared the worst.
But by the end of the day, the shares rebounded after both were able to easily
continue the regular borrowing of money they need to finance their day-to-day
operations and keep the nation’s mortgage machinery humming.
If Fannie and Freddie had been cut off from borrowing by other financial
institutions, the government might have been forced to step in and support them.
Still, the modest relief on Friday was tempered by concerns over what might
unfold in coming weeks, should the housing market’s woes continue and further
weaken the finances of Fannie and Freddie.
Uncertainty about the financial stability of the companies, which lie at the
heart of the nation’s housing market, underscored their size and complexity.
Both companies, which already have suffered $11 billion in losses in the last
nine months, could report new quarterly losses in August if foreclosures
The financial markets continue to show signs of stress, underscored by the
decline in the Dow Jones industrial average, which fell below 11,000 on Friday
for the first time in two years before closing at 11,100.54, down 1.1 percent.
Shares of Freddie Mac closed at $7.75, down more than 45 percent for the week.
Fannie Mae settled at $10.25, a 30 percent slide for the week. And a fresh sign
of industry problems emerged on Friday when the Federal Deposit Insurance
Corporation seized IndyMac Bank, making it the largest bank to fail since the
The company, an offshoot of Countrywide Financial and once one of the nation’s
largest independent mortgage lenders, was a major issuer of subprime loans.
After meeting with his economic policy team on Friday morning, President Bush
said that he had been briefed about the problems confronting Fannie and Freddie
by the Treasury secretary, Henry M. Paulson Jr.
“Freddie Mac and Fannie Mae are very important institutions,” the president
said. “He assured me that he and Ben Bernanke will be working this issue very
hard,” referring the chairman of the Federal Reserve.
Earlier in the day, Mr. Paulson sought to calm investors concerned that the
stock of Fannie and Freddie could be wiped out if the government took over one
or both of the companies and placed them under the control of a conservator, as
the law permits. The administration has prepared such a plan if the companies
continue to decline, people briefed on the plan have said.
“Today our primary focus is supporting Fannie Mae and Freddie Mac in their
current form as they carry out their important mission,” Mr. Paulson said.
Officials said Mr. Paulson wanted to convey the message that even under a
conservatorship, the companies would not be nationalized. Instead, a conservator
would have to prepare a plan to restore the company to financial health, much
like a company in Chapter 11 bankruptcy proceedings.
Federal Reserve officials took pains to dismiss rumors swirling through the
markets and in Washington that the central bank was considering a new program to
lend money directly to the companies through its so-called discount window. The
Fed began two such programs to lend money to the nation’s largest investment
banks last March.
“Fed officials are following the situation closely,” said Michelle A. Smith, the
Fed’s chief spokeswoman. “We’ve had no discussions with the companies about the
discount window. We don’t discuss the range of options we are considering.”
After a flurry of phone calls with administration and Fed officials, senior
Democrats in Congress also said they were persuaded that the steep declines in
the stock of the two companies did not reflect new underlying financial
problems, and that the companies had the financial wherewithal to get through
the turmoil. Their comments went far beyond the cautiously worded assurances by
senior officials earlier in the week that had done little to calm the markets.
“There is a sort of a panic going on and that’s not what ought to be,” said
Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate
banking committee. “The facts don’t warrant that reaction, in my view.”
Mr. Dodd said that he was persuaded by conversations with Mr. Paulson and Mr.
Bernanke that the two companies “are fundamentally sound and strong.”
He said that housing legislation the Senate approved on Friday evening, part of
which would overhaul the regulation of Fannie and Freddie, could be completed by
Congress and signed into law by President Bush by next week. The measure,
sponsored by Mr. Dodd, must go back to the House to be reconciled with its
version adopted in May.
Investors, left dizzy by the rapid-fire turns in Freddie and Fannie’s shares,
suffered through one of the most volatile days in the market since the Bear
Stearns debacle in March.
The day began darkly with investors confronting figures that once seemed
unthinkable: Freddie Mac’s stock was down a whopping 50 percent, with Fannie Mae
not far behind. As rumors of a government bailout made their way across trading
desks, Mr. Paulson’s statement — suggesting that no government takeover of
Fannie and Freddie was imminent — seemed to only increase the uncertainty.
“Paulson jumped in earlier today and tried to be reassuring, but in many ways it
backfired,” Edward Yardeni, an investment strategist, said. “He really didn’t
say anything that he hadn’t before.”
But some investors saw the depressed shares as a buying opportunity. At the
close, Freddie finished down just 3 percent, a relief to investors who had
feared the worst. Fannie, however, sold off 22 percent of its value.
As they watched the markets, senior officials at the Treasury and the Federal
Reserve were described on Friday as being less fixated on the stock prices of
Fannie and Freddie and more interested in the companies’ ability to raise money
to continue to fund their daily operations and buy new mortgages from banks and
The two companies already own or guarantee more than $5 trillion in mortgages.
They need to borrow money constantly so they can buy mortgages from lenders,
repackage them as securities and sell them to investors.
Fannie and Freddie hold some of the mortgages they buy in their own investment
portfolios; the rest are sold to pension funds, mutual funds and other
investors, with Fannie and Freddie guaranteeing each mortgage against default by
the homeowner. Officials noted that the companies’ ability to raise money had
improved in recent months, including on Friday, allowing the companies to borrow
at rates close to those of the United States Treasury.
One interpretation of this is that the debt markets believe that the federal
government will take steps to bail out the companies should they become
insolvent. Moreover, the insurance premiums that are paid by the buyers of the
debt securities issued by the companies declined significantly on Friday, a sign
that the markets do not believe the companies are on the brink of failure.
“In these volatile markets, share price is not the most reliable measure for
judging Fannie and Freddie and will not dictate the responses by the
regulators,” said Senator Charles E. Schumer, Democrat of New York, who has held
discussions all week with senior administration officials. “Rather, the
regulators are closely watching the performance of the companies’ bonds, and how
their yields compare to U.S. Treasuries. Right now, Freddie and Fannie bonds are
trading closer to Treasuries than they were in March after the Bear Stearns
collapse, a reassuring signal.”
It was a crushing liquidity problem — as lenders called in existing loans and
refused to lend any more — that ultimately prompted the government to rescue
Bear Stearns last March from possible bankruptcy.
Normally, when a company’s stock price plunges to dangerously low levels, the
company also has significant problems raising money in the debt markets because
borrowers fear that they may not be repaid. But in a perverse cycle, the news
this week that the government was considering putting them into a
conservatorship has had the effect of making the debt of those companies more
Fannie Mae, founded in 1938, was originally called the Federal National Mortgage
Association, but adopted its nickname as a formal title in the 1990s. Its
younger and smaller sibling, Freddie Mac, was begun in 1970.
Michael M. Grynbaum contributed reporting from New York.
Worst Fears Ease, for
Now, on Mortgage Giants’ Fate, NYT, 12.7.2008,
Lending laws unenforced
in housing crisis: Jackson
Wed Feb 20, 2008
By Michele Gershberg
NEW YORK (Reuters) - A U.S. mortgage meltdown has its roots in lending
discrimination against African-American and Hispanic communities and requires
federal intervention to prevent it from crippling municipal services, civil
rights activist Rev. Jesse Jackson said on Wednesday.
Jackson told the Reuters Housing Summit in New York that nearly 40 percent of
subprime loans went to black and Hispanic families, many of them in districts
once shunned by discriminatory "redlining" lenders who later devised a way to
profit there by selling a flawed financial product.
"They began to stereotype and target and cluster whole communities. It's kind of
like reverse redlining," Jackson said.
Jackson estimates that nearly half of those borrowers could have been eligible
for regular loan packages, but instead were locked into mortgages that threaten
to balloon out of their ability to pay when the adjustable interest rates reset.
"It suggests that if fair lending laws had been enforced ... we would not have
had this global economic crisis," Jackson said. "But while it started by
unenforced civil rights laws, the bleeding has not stopped there. It's now
engulfing the budgets of cities and counties and states."
Jackson also said that the U.S. Department of Justice was slow to respond, if at
all, to concerns of lending discrimination.
An estimated 1.5 million subprime mortgages, traditionally targeted at borrowers
with poor credit histories, will reset to higher interest rates this year,
putting many owners at risk of losing their homes. Another 500,000 will reset in
2009, according to Federal Reserve estimates.
Jackson said the federal government should institute a halt to foreclosure
proceedings and authorize the Federal Housing Administration or another body to
start a major restructuring of subprime loans, with lower interest rates and
payments spread out over a longer period.
He also called on state attorneys general to subpoena the major lenders on their
loan practices and impose penalties on those who have violated the law.
He described President George W. Bush's plan to offer $152 billion in tax
rebates this year to fend off a possible recession as irrelevant to the needs of
home owners facing foreclosure and ignoring the cause of the crisis.
(Editing by Gary Hill)
Lending laws unenforced
in housing crisis: Jackson, R, 20.2.2008,
Review of the year
From the sub-prime to the ridiculous:
how $100bn vanished
Mighty institutions and powerful figures undermined
little property deals
Monday December 31 2007
It began with low-income Americans being encouraged to borrow
mortgages they couldn't afford.
The economic butterfly effect would eventually cause deals worth billions of
dollars to fall apart; the first run on a British bank in 140 years; some of the
most powerful figures on Wall Street losing their jobs; wild gyrations on the
markets; and dire warnings that the world is on the brink of recession.
At the start of the year, stockmarkets were at six-year highs and £40bn worth of
mergers and takeovers were awaiting completion. Private equity firms and hedge
funds were gorging themselves on cheap money and a handful of secretive, hugely
wealthy individuals were becoming increasingly influential. But it was the
millions on more modest incomes who would ultimately shape the events of 2007.
As the US housing market cooled and interest rates rose, many on the bottom
rungs of the economic ladder found it difficult to meet their monthly mortgage
The first real concerns about sub-prime mortgages emerged at the end of
February, when Wall Street suffered its worst day since the terrorist attacks of
2001. By April one of the biggest sub-prime mortgage lenders in the US had gone
bankrupt and there was talk of a full-blown crisis. Credit more broadly began to
dry up as lenders became nervous.
Fear also spread as it became clear that much of the bad debt had been packaged
up and sold on around the world's financial system. Nobody, not even the banks
themselves, knew who owned the toxic debt.
Some otherwise arcane practices of the financial world such as collateralised
debt obligations and structured investment vehicles suddenly became everybody's
The flood of private equity money turned into a trickle as it became more
difficult to borrow, derailing deals including an attempt to buy J Sainsbury
and, at the close of the year, an attempt by Lord Harris to take Carpetright
private. Hedge funds too, which rely on leveraging their funds, have had their
The credit crunch was behind the biggest story of the year, Northern Rock. It
emerged in September that the bank had been forced to apply to the Bank of
England for emergency funds as liquidity had dried up in the market. Savers were
told not to panic. But they did anyway. The next day, there were long lines of
people threading through high streets across Britain, hoping to retrieve their
The scenes triggered a postmortem into how a major bank - the fifth biggest
provider of mortgages in the country - could reach the brink of collapse without
any apparent action to prevent it from going under.
The inquest has so far given us the phrase "moral hazard" from the governor of
the Bank of England, Mervyn King, who believed it was outside his remit to
rescue a bank that had got into difficulties through risky borrowing on
international money markets. It has also given us the sight of MPs from the
Treasury select committee grappling to discover who from the much lauded
tripartite structure of regulation for the UK financial system - the Bank of
England, the Treasury and the Financial Services Authority - was to blame for
But it has not given us any definitive answers save that Northern Rock should
not have risked so much on such a finely calibrated business model and should
have seen it coming.
King came under pressure to quit but no one from the tripartite system has
fallen on their sword. Even the architect of the business model, Northern Rock's
chief executive Adam Applegarth, hung on until the middle of November when he
The stricken bank has received £25bn of taxpayers' cash. There are still two
potential bidders - Sir Richard Branson's Virgin and the Olivant vehicle led by
former Abbey National boss Luqman Arnold. Other options include nationalisation
or a carve-up among high street banks.
As the mortgage crisis spread, Wall Street bosses began dropping like neatly
lined-up dominoes. Stan O'Neal was forced out at Merrill Lynch and Charles
Prince was ousted from the world's largest banking group, Citigroup. The most
powerful woman on Wall Street, Zoe Cruz, lost her job at Morgan Stanley when the
bank recorded losses of $3.7bn. Another Wall Street bank, Bear Stearns, suffered
the first loss in its 84-year history.
The numbers just kept getting bigger. This month the Swiss bank UBS wrote off a
further $10bn of sub-prime loans, on top of $3.4bn already announced. Two days
later the Bank of England joined other central banks in pouring £50bn into the
financial markets in the hope of staving off a meltdown. A succession of Wall
Street banks have turned to sovereign funds in China, Singapore and the Middle
East for injections of cash. The unravelling of events has been a stunning
example of how interdependent the world economy has become.
Confidence appears to be ebbing. Retailers in Britain were forced to slash
prices before Christmas to shift stock. According to the Royal Institute of
Chartered Surveyors, house prices in Britain are falling at their fastest rate
in two years. The outlook for jobs is the worst for a decade. Jon Hunt, who sold
the estate agency Foxtons in April, may, it turns out, have called the top of
The oil price reaches its peak just short of $100 a barrel (November 21)
The pound hits $2 for the first time since 1992 (April 16)
Price HSBC receives selling its headquarters in Canary Wharf (April 30)
Ben Bernanke's estimate of total sub-prime losses (July 19)
From the sub-prime to
the ridiculous: how $100bn vanished, G, 31.12.2007,
city in suburbs is cost of home crisis
Fri Dec 21,
By Dana Ford
California (Reuters) - Between railroad tracks and beneath the roar of departing
planes sits "tent city," a terminus for homeless people. It is not, as might be
expected, in a blighted city center, but in the once-booming suburbia of
The noisy, dusty camp sprang up in July with 20 residents and now numbers 200
people, including several children, growing as this region east of Los Angeles
has been hit by the U.S. housing crisis.
The unraveling of the region known as the Inland Empire reads like a 21st
century version of "The Grapes of Wrath," John Steinbeck's novel about families
driven from their lands by the Great Depression.
As more families throw in the towel and head to foreclosure here and across the
nation, the social costs of collapse are adding up in the form of higher rates
of homelessness, crime and even disease.
While no current residents claim to be victims of foreclosure, all agree that
tent city is a symptom of the wider economic downturn. And it's just a matter of
time before foreclosed families end up at tent city, local housing experts say.
"They don't hit the streets immediately," said activist Jane Mercer. Most
families can find transitional housing in a motel or with friends before turning
to charity or the streets. "They only hit tent city when they really bottom
Steve, 50, who declined to give his last name, moved to tent city four months
ago. He gets social security payments, but cannot work and said rents are too
"House prices are going down, but the rentals are sky-high," said Steve. "If it
wasn't for here, I wouldn't have a place to go."
IN VACANT HOUSES'
Nationally, foreclosures are at an all-time high. Filings are up nearly 100
percent from a year ago, according to the data firm RealtyTrac. Officials say
that as many as half a million people could lose their homes as adjustable
mortgage rates rise over the next two years.
California ranks second in the nation for foreclosure filings -- one per 88
households last quarter. Within California, San Bernardino county in the Inland
Empire is worse -- one filing for every 43 households, according to RealtyTrac.
Maryanne Hernandez bought her dream house in San Bernardino in 2003 and now
risks losing it after falling four months behind on mortgage payments.
"It's not just us. It's all over," said Hernandez, who lives in a neighborhood
where most families are struggling to meet payments and many have lost their
She has noticed an increase in crime since the foreclosures started. Her house
was robbed, her kids' bikes were stolen and she worries about what type of
message empty houses send.
The pattern is cropping up in communities across the country, like Cleveland,
Ohio, where Mark Wiseman, director of the Cuyahoga County Foreclosure Prevention
Program, said there are entire blocks of homes in Cleveland where 60 or 70
percent of houses are boarded up.
"I don't think there are enough police to go after criminals holed up in those
houses, squatting or doing drug deals or whatever," Wiseman said.
"And it's not just a problem of a neighborhood filled with people squatting in
the vacant houses, it's the people left behind, who have to worry about people
taking siding off your home or breaking into your house while you're sleeping."
Health risks are also on the rise. All those empty swimming pools in
California's Inland Empire have become breeding grounds for mosquitoes, which
can transmit the sometimes deadly West Nile virus, Riverside County officials
But it is not just homeowners who are hit by the foreclosure wave. People who
rent now find themselves in a tighter, more expensive market as demand rises
from families who lost homes, said Jean Beil, senior vice president for programs
and services at Catholic Charities USA.
"Folks who would have been in a house before are now in an apartment and folks
that would have been in an apartment, now can't afford it," said Beil. "It has a
For cities, foreclosures can trigger a range of short-term costs, like added
policing, inspection and code enforcement. These expenses can be significant,
said Lt. Scott Patterson with the San Bernardino Police Department, but the
larger concern is that vacant properties lower home values and in the long-run,
decrease tax revenues.
And it all comes at a time when municipalities are ill-equipped to respond. High
foreclosure rates and declining home values are sapping property tax revenues, a
key source of local funding to tackle such problems.
Earlier this month, U.S. President George W. Bush rolled out a plan to slow
foreclosures by freezing the interest rates on some loans. But for many in these
parts, the intervention is too little and too late.
Ken Sawa, CEO of Catholic Charities in San Bernardino and Riverside counties,
said his organization is overwhelmed and ill-equipped to handle the volume of
people seeking help.
"We feel helpless," said Sawa. "Obviously, it's a local problem because it's in
our backyard, but the solution is not local."
(Additional reporting by Andrea Hopkins in Ohio;
Editing by Mary Milliken and
Tent city in suburbs is cost of home crisis, R,
American Dream in Reverse
The New York Times
first time since the Carter administration, homeownership in the United States
is set to decline over a president’s tenure. When President Bush took office in
2001, homeownership stood at 67.6 percent. It rose as the mortgage bubble
inflated but is projected to fall to 67 percent by early 2009, which would come
to 700,000 fewer homeowners than when Mr. Bush started. The decline, calculated
by Moody’s Economy.com, is inexorable unless the government launches a heroic
effort to help hundreds of thousands of defaulting borrowers stay in their
These days, modest relief efforts are in short supply, let alone heroic ones.
Some officials seem to think that assistance would violate the tenet of personal
responsibility that borrowers should not take out loans they cannot afford. That
The foreclosure crisis is rooted in reckless — and shamefully underregulated —
mortgage lending. Many homeowners — mainly subprime borrowers with low incomes
and poor credit — are now stuck in adjustable-rate loans that have become
unaffordable as monthly payments have spiked upward. Their predicament is not
entirely of their own making, and even if it were they would need to be bailed
out because mass foreclosures would wreak unacceptable damage on the economic
and social life of the nation.
The relief efforts so far have been too little, too late. In August, the White
House established a program to allow an additional 80,000 borrowers to refinance
their loans through the Federal Housing Administration — on top of 160,000 who
were already eligible. That’s not enough. Foreclosure filings soared to nearly
244,000 in August alone.
Federal regulators and Treasury officials are urging mortgage lenders and
mortgage servicers to do their utmost to modify loan terms for at-risk
borrowers, but saying “please” hasn’t worked. To be effective, modifications
must reduce a loan’s interest rate or balance or extend its term, or some
combination of the three. Gretchen Morgenson reported recently in The Times that
a survey of 16 top subprime servicers by Moody’s Investors Service found that in
the first half of the year, modifications were made to an average of only 1
percent of loans on which monthly payments had increased.
What’s missing is executive leadership to bring together many players, including
lenders, servicers, bankers and various investors. All of them are affected
differently depending on whether and how a borrower is rescued, which makes it
difficult to agree on a rescue plan. But all of them also made megaprofits
during the mortgage bubble. Under firm leadership, they could come up with a way
to modify many loans that are now at risk.
Democratic Congressional leaders have called on the Bush administration to
appoint one senior official to lead a foreclosure relief effort. The White House
dismissed the idea, saying, in effect, that it’s doing enough.
Congress should move forward on other remedies. The most important is to mend an
egregious flaw in the current bankruptcy law that prohibits the courts from
modifying repayment terms of most mortgages on a primary home. Two bills, one in
the House and one in the Senate, would treat a mortgage like other secured debt,
allowing a bankruptcy court to restructure it so that it’s affordable for the
borrower. That would give defaulting homeowners and their advocates much needed
leverage in dealing with lenders and servicers. Creditors would presumably
prefer to cut a deal with a borrower rather than be subject to the decision of a
The administration and Congress should work to avoid mass foreclosures.
Meanwhile, bankruptcy reform would give borrowers a shot at keeping their homes.
The American Dream in Reverse, NYT, 8.10.2007,
as UK bank chaos grows
warns of sharp downturn
· Tory leader attacks Brown over crisis
September 16, 2007
and Lisa Bachelor
house price growth will be halved next year as the global financial crisis
exacerbates the impact of rising mortgage rates, according to Nationwide, the
biggest mortgage lender.
dramatic bail-out of high street bank Northern Rock underlined the impact of the
American 'sub-prime' mortgage crisis on Britain's financial sector, Fionnuala
Earley, Nationwide's group economist, said she expected house price inflation to
slow to around 3 per cent next year.
Thousands of anxious customers queued outside Northern Rock branches for a
second day yesterday, ignoring calls for calm from the Chancellor, Alistair
Darling, and the bank's management, and sparking fears of a full-blown 'run' on
Channel 4 News last night, Darling said he had been assured by the Financial
Services Authority that Northern Rock was capable of meeting its financial
obligations to its customers.
first signs of political fallout from the crisis, David Cameron accused Gordon
Brown of failing to rein in public and private borrowing over the last decade,
saying the nation's economic growth is based on a 'mountain of debt'. Writing in
today's Sunday Telegraph, the Tory leader says: 'This government has presided
over a huge expansion of public and private debt without showing awareness of
the risks involved.
'Though the current crisis may have had its trigger in the United States...
under Labour our economic growth has been built on a mountain of debt.'
House price growth was running at just below 10 per cent in August, but
Nationwide believes it will have dropped to 7 per cent by December and continue
slowing throughout next year.
The worldwide credit crunch that pushed Northern Rock to the brink of collapse
could make a housing market slowdown worse, Earley warned. 'I think all it can
do is make it [the market] cooler: that comes through sentiment, and through
With base interest rates at a six-year high of 5.75 per cent, economists said
that the feelgood factor was already evaporating and that the Northern Rock
crisis could deal a fresh blow to confidence.
'This confirms some of the fears that people had, and reinforces the idea that
they need to be more circumspect, and that money is tighter,' said Richard
Hyman, director of retail research firm Verdict.
'It couldn't have come at a worse time: consumer confidence was already heading
south,' said Kevin Hawkins, director general of the British Retail Consortium,
though he added that, as long as Northern Rock was the only casualty, the
effects could be short-lived.
A report from property website Rightmove, released on Friday, showed that
property prices fell in the last month for the first time in three years. It is
expected that, although there will be overall growth in the housing market, some
areas of the UK could suffer significant price decline.
Meanwhile, Northern Rock apologised to customers last night, saying it was
'disappointed to see uncertainty caused'. The apology came amid growing
speculation of a takeover bid, with HSBC and Lloyds TSB both being mooted as
potential suitors. Insiders are predicting that a takeover could occur within
weeks to secure the bank's future. One plan currently being looked at by City
bankers is to divide the company's £100 billion mortgage portfolio between some
of the major banks.
Savers have been rushing to pull out their cash since it emerged last Thursday
that Darling had sanctioned an emergency loan from the Bank of England to
prevent Northern Rock going bust.
One couple had even camped outside Northern Rock's Cheltenham branch in
Gloucestershire overnight, desperate to withdraw the £1m proceeds of a house
sale. 'We were told that because our money was in an online account we wouldn't
be able to withdraw it there and then,' said Fiona Howard. 'That money is our
lifeline, as we are living in rented accommodation at present.'
'Housing boom over' as UK bank chaos grows,
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